Is The US Economy in Trouble ?

                                                         Comments due by Nov. 6, 2015

I write about economics for a living. Part of my job is to look into the maw of economic data, financial market indicators, anecdotal reports from businesses and whatever else I can get my hands on, and turn it all into a crisp, clear narrative about the United States and global economies.
 But right now I’m stuck. I have no idea how the United States economy is doing. And the closer I look at the data, the more contradictory it looks. A strong case could be made that it is in its most vulnerable spot in years, at risk of a new recession amid a global slowdown. The market for many types of risky bonds is in disarray, and “the dangers facing the global economy are more severe than at any time since the Lehman Brothers bankruptcy in 2008,” wrote Larry Summers in a NYT article. There is also a strong case that the United States economy is robust enough to withstand whatever challenges might arise from overseas, and that the evidence of a slowdown is scattered and overstated. Fewer people have filed for unemployment insurance in recent weekly readings, for example, than any time since 1973. I’ve tried several times in the last few weeks to convince myself that one of those stories is correct, but just can’t decide between them. And because The New York Times is not fond of headlines that include the “shruggie” emoticon (for the uninitiated, that would be ¯\_(ツ)_/¯), I have held off writing anything. Why am I telling you all this? Because sometimes the most accurate portrayal of a situation revolves around uncertainty — and because we journalists aren’t always honest about that. This is my effort to be a little more honest. Rather than picking an analytical case and pretending to be more certain than I am, I want to walk readers through the conflicting evidence. Below, I do so in the form of the debate that has been playing out within my own head — and, very likely around conference tables at every economic research group and central bank you can think of. It sure feels as if we’re on the verge of something bad. The expansion is six years old, making it already the fourth longest since World War II. If the economy does soften, the Federal Reserve is out of ammunition to do much of anything about it. This feels a little like late 2000, when there were signs the economy was losing momentum even though growth was still technically positive. Then in 2001 there was a mild recession. Whoa, not so fast. Back then there was a huge correction in the stock market and downturn in business investment that caused the recession.
What are the sectors that you see correcting in 2015 or 2016 that put the economy at that much risk? Emerging markets, especially China? They’ve had years of huge capital inflows, in no small part because of Fed policies, that papered over longer­term problems. Now the capital is flowing in the other direction, and the correction is looking to be vicious. Sure, but why would that cause anything more than modest ripples for the United States economy? Total exports to China were $124 billion last year, about 0.7 percent of United States G.D.P. And I know you’re going to mention financial linkages, but it’s not as if American banks are sitting on a ton of Chinese government debt. Even if things get worse in emerging markets, isn’t this more like 1998, when an emerging markets crisis enveloped East Asia and Russia? As a reminder, the United States economy grew 4.7 percent in 1999, faster than in the preceding 15 years. Yeah, but there’s no doubt that the financial markets, including in the United States, have been flashing warning signs since this summer. Sure, markets have been jumpy lately. But when you step back and take a bit of a long view, is it really anything to sweat about? The Standard & Poor’s 500­stock index was actually up very slightly for the year at Monday’s close (up 0.6 percent, to be precise). Long­term Treasury bond rates have fallen a good bit since the summer but are still higher than they were back in the spring, meaning that the bond market isn’t exactly panicking. Maybe Wall Street is just whining because after five years in which asset prices soared much more than the real economy, markets are taking a breather while the rest of the economy catches up? Maybe, but there are some cracks showing in the data on the real economy too. The last couple of jobs reports have been really bad! This month the data on retail sales and surveys of businesses have shown the same kind of softness. Maybe the economy is like Wile E. Coyote  running off the cliff , and as soon as we look down we’ll see it was all a mirage and fall. Come on, that’s not how the economy works. For the economy to fall into recession, something has to cause it.

A financial crisis that freezes up the credit system, tight monetary policy intended to fend off inflation, a collapse in the stock market, something. Recessions don’t just happen for no particular reason. It’s true that the economy is starting to feel an impact of the strong dollar (resulting in weaker exports) and cheaper oil (which means less oil and gas exploration). But we’ve seen soft patches like this many times before. For example, job growth has been really weak the last couple of months, but it was about equally weak in June and July of 2013, and nobody even remembers that soft patch. And if you look at the broadest measures of the economy, there’s not much sign of a downturn at all. For example, over the first nine months of 2015, United States gross domestic product rose at about a 2 percent annual rate, including a 1.5 percent third­quarter pace reported Thursday, broadly similar to the last several years. This could just be a case where people are freaked out by the market moves and are straining to discern a downshift in the economy that isn’t really there. Yeah, but look at all the anxiety we’re hearing this earnings season. Big, stalwart companies like Caterpillar and Walmart have downgraded their forecasts. Surely those are the canaries in the recessionary coal mine. There you go with the clichés again. When you look a little more closely at some of these disappointing forecasts, what they’re really telling us about the state of the economy is far more ambiguous. Take Caterpillar. Yes, it slashed its revenue forecast for 2015 and said it would cut 10,000 jobs in the next three years. But the major reason is the downturn in mining and energy exploration because of cheaper oil and other commodities. Obviously, it’s too bad for those people who will lose their jobs, but the flip side is cheaper gasoline and other fuels for American consumers, which is an economic boost. The story out of Walmart is even more promising for the economy. Sure, the company’s stock dropped 10 percent in a single day two weeks ago as it downgraded its earnings projections. But look at why it downgraded those projections — because it is investing more to upgrade its stores, and paying its workers more, both of which will weigh on profits. We’ve had years in which the problem in the economy has been companies that won’t invest and workers who aren’t getting pay raises. Walmart’s earnings are suffering because of the opposite! That’s good news for the economy, even if it’s bad news for Walmart shareholders. O.K., Pollyanna, anything out there that does make you nervous? Oh, sure. The drop in stock prices and rise in borrowing costs for riskier companies means that capital is more expensive, and the dollar keeps strengthening on currency markets that will keep holding things back. And if I’m wrong about any of this, the economy really does lack the shock absorbers right now that would help it: The Fed’s most effective tools are pretty well spent, and there’s no way a Republican Congress would even consider fiscal stimulus. So I get being nervous, but this doesn’t feel like a moment when there are huge imbalances sitting out there due for a correction. I hope you’re right. But if the 2008 crisis taught us anything, it’s that trouble can spread in ways that are hard to predict, even if you think you know what’s going on. Yeah, but what happened in 2008 was a once ­a ­century kind of storm. If you always think that the big one is imminent, most of the time you’ll turn out to be wrong. (The Upshot NYT 10/29/2015)

Why Negative Interest Rates?

                                          Comments due by Oct. 30, 2015 

When the Federal Open Market Committee decided in September to leave its main policy rate where it’s been for seven years—close to zero—it included an extraordinary detail. According to the “dot plot,” the display of unattributed individual policy recommendations, one committee member believed that the rate should be below zero through 2016. That is, rates should go to a place the U.S. has never had them before.

In theory, it shouldn’t be possible for a central bank to keep short-term interest rates below zero. Banks would have to pay the Federal Reserve to hold reserves. Consumers would have to pay banks to hold deposits. Banks and people can hold physical cash, which charges no interest. This is why economists see zero as the lowest possible rate. It’s just theory, though; real-world experience shows the actual lower bound is somewhere below zero.

Denmark’s key bank rate dipped below zero in 2012 and is at minus 0.75 percent. Economists recently surveyed by Bloomberg see negative rates in that country continuing at least into 2017. Switzerland has kept the rate at minus 0.75 percent since early this year, and Sweden’s is minus 0.35 percent. These countries have a different monetary goal from that of the Fed. Denmark and Switzerland have been working to remove incentives for foreigners to deposit money in their banks. Massive foreign inflows would drive their currencies to appreciate so much they would become seriously misaligned with the euro, the currency of their main trading partners. Sweden has been attempting to create inflation.

The strategy has had some success. Denmark has been able to hold on to its peg to the euro. Switzerland dropped its euro peg, and after an initial runup, the Swiss franc has traded within a predictable band. Sweden’s inflation has seesawed.

In all three countries, banks were reluctant to pass negative rates on to their domestic customers. In Denmark deposit rates have fallen, and some banks have raised fees for their services, but “real rates for real people were actually never negative,” says Jesper Rangvid, a professor of finance at the Copenhagen Business School. The same is true for Sweden, according to a paper by the Riksbank, the central bank. In Switzerland, one bank, the Alternative Bank Schweiz, will impose an interest charge on retail deposits starting in January.

There’s no evidence of a flight to cash in any of the three countries. According to central bank data, Danish households have added 28 billion kroner ($4.3 billion) to bank deposits since rates shrank to their record low on Feb. 5. That’s because a sack of bills has to be stashed somewhere safe, and protection costs money. According to Rangvid, rates would have to drop as low as minus 10 percent before people start “building their own vaults.” In its paper, Sweden’s Riksbank pointed out the same possibility but declined to say how far below zero rates would have to go to trigger depositors’ exit from the banks in the largely cash-free country.

In the U.S., Narayana Kocherlakota, the dovish president of the Minneapolis Fed, has expressed support for negative rates as an option. (He’s likely the anonymous negative rate dot-plot guy.) So has John Williams of the San Francisco Fed. William Dudley of the New York Fed, a moderate, said during an Oct. 15 event that the FOMC had considered negative rates during the depths of the financial crisis. Experience in Europe, he said, showed that the unintended consequences of negative rates were “less than what people had feared.”

Since they dropped rates below zero, there has been no clear, consistent economic trend among the three countries. In Denmark asset prices have risen as Danes sought higher returns. Spurred by speculation, the local stock market has recorded more than twice the gains of the Stoxx Europe 600. Danske Bank, Denmark’s biggest lender, says Copenhagen is becoming Scandinavia’s riskiest property market, because of a surge in prices. Danish businesses have increased their investments only 6 percent; private consumption has risen 5 percent. According to Torsten Slok, Deutsche Bank’s chief international economist in New York and a Dane, negative rates “raise risks in the short term and do little more to help the economy than what can be achieved with bond purchases.”

In Switzerland there’s little sign of overheated property or stocks, or new consumption. Recently, Thomas Jordan, head of the Swiss National Bank, saw potential side effects but called negative rates an “important and unavoidable monetary instrument to weaken the attractiveness of the [Swiss] franc.”

All three countries have dipped below zero without massive withdrawals. That’s a valuable lesson for economists. But in Sweden, it’s too early to tell whether negative rates have created inflation. And in Denmark and Switzerland, this tool has succeeded only in its precise and limited purpose: to manage exchange rates with the euro. That finding will be of limited value to the Fed.

—With Peter Levring, Nick Rigillo, and Catherine Bosley

Is family paid leave inevitable?

                                                           Comment due by Oct. 23, 2015

Presidential candidates are talking about paid family leave — both for and against it — because they know this issue is top of mind for voters throughout the country. For American voters, family comes first. Whether it's for a newborn, an ailing parent, or a spouse nursing an injury, being there and providing for family isn't negotiable.

The question is whether we as a nation are going to let every family fend for themselves, or adopt a national solution that makes sure that putting family first doesn't mean losing your paycheck or your job. Voters are demanding policies that reflect this priority. 

"It's about time we had paid family leave for American families and join the rest of the world," said Secretary of State Hillary Clinton in her opening remarks at the first Democratic debate.

Vermont Senator Bernie Sanders echoed: "We should not be the only major country that does not provide medical and — and parental leave — family and parental leave to all of our families."

Former Maryland Gov. Martin O'Malley built on the idea: "We would be a stronger nation economically if we had paid family leave."

The three Democratic front-runners are not the only ones speaking to this issue. Florida Sen. Marco Rubio, who's running in the Republican primary, has come out with his own paid family-leave proposal (albeit a severely flawed one), and former Hewlett-Packard CEO Carly Fiorinadevoted an entire blog post to defending her position against paid family leave.

Recent polling by "Make it Work," a campaign I co-founded to advance women and working families' economic issues, found that 75 percent of voters say they support a package of work-family policies that includes paid family leave, paid sick days, equal pay, affordable child care and a higher minimum wage. Fifty-six percent of voters said they are more likely to vote for a candidate who supports this plan.

And it's not just women. Fifty-five percent of men say they are more likely to vote for candidates who support this plan. The number of men who use the job protections of the current Family and Medical Leave Act to care for family members has been slowly but steadily increasing, and more and more men are calling for employers to adopt paid parental leave policies.

Paid family leave and other family-friendly policies are good for children, good for families, good for public health and, as Gov. O'Malley noted, good for the economy. In the states that have adopted paid leave – California, New Jersey and Rhode Island – both employers and employees report benefiting from the law. And in recent months, we've heard from companies like Netflix, Microsoft, Adobe, LinkedIn,Facebook, Google and others about their recently adopted generous paid leave policies for moms and dads. These policies aren't always perfect, but the idea that companies should be providing these supports for families – from 12 weeks to 52 weeks of fully paid leave – comes from the understanding that these policies are not only the right thing to do, but also good for business and retaining great employees.

We can't rely on companies to do it alone, or too many people will be left behind – especially low-income families who need paid leave the most. That's why presidential candidates are taking the matter into their hands. In the Democratic debate, Sec. Clinton pointed to Sen. Kirsten Gillibrand (D-NY) as a champion of this issue. The Family Act, the bill championed by Gillibrand and Rep. Rosa DeLauro (D-Conn.), would guarantee paid leave to care for new children and those with serious illnesses. With the right candidate, paid family and medical leave could finally become a reality in 2017. 

Commentary by Vivien Labaton, co-founder and co-director of MakeIt Work

Human Development Index

                                                      Comments due by Oct. 16, 2015

The HDI was created to emphasize that people and their capabilities should be the ultimate criteria for assessing the development of a country, not economic growth alone. The HDI can also be used to question national policy choices, asking how two countries with the same level of GNI per capita can end up with different human development outcomes. These contrasts can stimulate debate about government policy priorities.

The Human Development Index (HDI) is a summary measure of average achievement in key dimensions of human development: a long and healthy life, being knowledgeable and have a decent standard of living. The HDI is the geometric mean of normalized indices for each of the three dimensions.

The health dimension is assessed by life expectancy at birth component of the HDI is calculated using a minimum value of 20 years and maximum value of 85 years. The education component of the HDI is measured by mean of years of schooling for adults aged 25 years and expected years of schooling for children of school entering age. Mean years of schooling is estimated by UNESCO Institute for Statistics based on educational attainment data from censuses and surveys available in its database. Expected years of schooling estimates are based on enrolment by age at all levels of education. This indicator is produced by UNESCO Institute for Statistics. Expected years of schooling is capped at 18 years. The indicators are normalized using a minimum value of zero and maximum aspirational values of 15 and 18 years respectively. The two indices are combined into an education index using arithmetic mean.

The standard of living dimension is measured by gross national income per capita. The goalpost for minimum income is $100 (PPP) and the maximum is $75,000 (PPP). The minimum value for GNI per capita, set at $100, is justified by the considerable amount of unmeasured subsistence and nonmarket production in economies close to the minimum that is not captured in the official data. The HDI uses the logarithm of income, to reflect the diminishing importance of income with increasing GNI. The scores for the three HDI dimension indices are then aggregated into a composite index using geometric mean. Refer to Technical notes for more details.

The HDI does not reflect on inequalities, poverty, human security, empowerment, etc. The HDRO offers the other composite indices as broader proxy on some of the key issues of human development, inequality, gender disparity and human poverty.

A fuller picture of a country's level of human development requires analysis of other indicators and information presented in the statistical annex of the report.

Copy this link into your browser to look at the HDI data:

http://hdr.undp.org/en/content/table-1-human-development-index-and-its-components

OPEC's Family Feud

                                                   Comments due by Oct 9, 2015

When Venezuelan Oil Minister Juan Pablo Pérez Alfonso resigned in 1963, he blasted the Organization of Petroleum Exporting Countries, at the time torn by internal rivalries, for failing to produce any benefits for his country. Half a century later, OPEC is still split and Venezuela is again unhappy, this time at the unwillingness of the organization’s top producer, Saudi Arabia, to rescue oil prices from a six-year low that’s dragging the battered Venezuelan economy into an even deeper crisis.

On Sept. 10, Venezuela’s oil minister, Eulogio del Pino, tweeted appeals for OPEC and non-OPEC countries “to have a discussion on fair prices, minimum prices to ensure sustainability” and to “overcome our differences of opinion.” Venezuelan President Nicolás Maduro said on Sept. 16 that he was making progress on organizing a summit of petroleum exporting countries to have that discussion. OPEC member Algeria is backing the Venezuela-proposed conference—as well as Maduro’s desire for a higher price. Venezuelan officials didn’t respond to requests for comment.

Maduro’s plans won’t pan out unless Saudi Arabia stops flooding the market. There’s no sign it’ll retreat from that strategy, which is helping it preserve and even gain market share. “OPEC is of no use today,” says former Algerian Prime Minister Ahmed Benbitour. “The war now is about market share, not price, and Algeria is getting no benefit from this organization.” OPEC declined to comment for this story.

Venezuela’s and Algeria’s complaints raise the question of why some members stay in OPEC if the Saudis call the shots and ignore pleas for higher prices. Neither Venezuela nor Algeria has made moves to quit. Not only is the group intact, but former member Indonesia is returning, boosting membership to 13 nations.

Disgruntled members “don’t leave because they still believe there could be something in the future where the group does make a decision” to boost prices and cut production, says Jamie Webster, an oil analyst at researcher IHS. “It’s much easier to just keep OPEC alive than to shut it down, and with it a key communication channel” among governments whose financial health depends largely on oil income.

Of the 1.7 trillion barrels that remain to be extracted worldwide, 1.2 trillion, or 70 percent, are controlled by OPEC’s current members. Venezuela and Saudi Arabia hold 18 percent and 16 percent, respectively, and Iran and Iraq 9 percent each, according to oil major BP. These four nations, with Kuwait, are OPEC’s founding members.

“Just look at the outlook for oil in the next 10, 20, 30 years. It is expected that OPEC countries will actually have to come up with most of the growth in supply to meet the demand,” says former OPEC Secretary General Adnan Shihab-Eldin of Kuwait. “If OPEC didn’t exist, it would be needed in the future much more than in the present or the past” to coordinate production and keep the world supplied.

Pricing has often been a bone of contention, with Algeria, Iran, Iraq, Libya, and Venezuela pushing for higher prices, a hawkish stand compared with Saudi Arabia and its neighbors Kuwait, Qatar, and the United Arab Emirates. “Venezuela’s position within OPEC is to pursue a strategy of low production and high prices, since they can’t attract investments” to boost output, says Carlos Rossi, president of Caracas-based consulting firm EnergyNomics. Gulf Arabs are more inclined to accept a lower price to keep consumers hooked on cheap gasoline and thus extend the Age of Oil. Saudi Arabia in particular is more likely to accept a lower price that preserves global growth and gives it influence far in excess of its actual economy. Says Ed Morse, Citigroup Global Markets managing director: “Saudi Arabia’s economy is the size of Illinois’s.” Yet the nation sits at the same table as China, Europe, Japan, and the U.S. thanks to its role as the major producer.

Instead of lowering output to prop up prices, as suggested by Algeria and Venezuela, Saudi Oil Minister Ali al-Naimi lobbied his OPEC counterparts in November 2014 not to yield market share to competing suppliers, including U.S. producers of shale oil. Crude sank and trades at about $50 a barrel, half its level a year ago. “What OPEC wanted to do is have a fresh look at the structural changes that have taken place in the oil market with the advent of U.S. shale and other producers, who at a very high price were able to bring in fresh supplies that far exceed what demand called for,” says Shihab-Eldin.

Algeria’s and Venezuela’s attempts to recruit non-OPEC producers in an effort to increase prices have been rejected by Russia and Mexico, two of the largest exporters outside the group. The Mexicans say their focus is on restoring the productivity of their biggest field. Russia says it doesn’t have the ability of some Persian Gulf producers to quickly raise or lower output because of the harsh winters and complex geology at its Siberian oil fields. “You cannot regulate productivity of Russian wells simply by turning a faucet,” Sergei Klubkov, exploration and production analyst at Moscow-based Vygon Consulting, said in an e-mail.

The International Energy Agency says Saudi Arabia is winning the fight for market share, driving higher-cost producers—for example, some U.S. shale companies—out of business. Non-OPEC supply is expected to fall in 2016 by the most in more than two decades as producers shut wells that can’t operate profitably with oil below $50 a barrel. Production outside OPEC will fall by 500,000 barrels a day, to 57.7 million, in 2016, the agency said on Sept. 11.

That’s no solace for those in OPEC who are hard-pressed for cash. Fresh supply is likely to hit the market from Iran next year, when the oil export ban is lifted as a result of the July agreement with the U.S. and the other Western powers restricting its nuclear program. Oil prices could drop to as low as $20 a barrel, Goldman Sachs said on Sept. 11.

Saudi Arabia’s production of about 10.5 million barrels a day is its highest ever, and the kingdom still has spare capacity of more than a million barrels. Other OPEC members are pumping less oil as projects to bring fresh crude to the market were derailed or delayed by political or social unrest. Venezuela is producing 2.5 million barrels a day, vs. a peak of 3.7 million in 1970. Algeria and Nigeria are in similar straits.

Those three nations, plus Iraq and Libya, are the OPEC members most vulnerable to political turmoil as cheap oil hammers their currencies and weakens their ability to sustain social subsidies. Venezuela “appears poised for a near-term crisis” amid protests and shortages of basic goods as December’s parliamentary elections get closer, analysts Christopher Louney and Helima Croft of the Royal Bank of Canada said in an August report on OPEC’s “fragile five.”

“OPEC is like a family where the children quarrel but can’t do without each other,” says Karin Kneissl, a Vienna-based university lecturer on energy politics and author ofEnergy Poker. “They know they are better off talking to each other to preserve the common, long-term interest; even those who left long to return if they can.”

Indonesia voluntarily suspended its OPEC membership in 2009 as its production declined to the point that it had to import oil. Indonesia still pumps oil for its domestic market. It will return officially on Dec. 4 as the first member that isn’t a net oil exporter. As OPEC’s only member in East Asia, Indonesia could help strengthen the group’s ties in the region, where oil demand is strongest, said Indonesian Energy Minister Sudirman Said in June. As both oil consumer and producer, it will help OPEC bridge the divide between the two groups, he said.

“The benefits from staying with the group outweigh by far the cost of membership,” says Hasan Qabazard, chief executive officer of Kuwait Catalyst and former head of research at OPEC. “Getting firsthand access to market data, research, and information that may affect the market” could be “the motivation behind Indonesia’s application” to return.

“I don’t see OPEC falling apart,” says Fayyad Al-Nima, Iraq’s deputy oil minister for extraction. And Venezuela’s reason for sticking with the group? Says Carl Larry, head of oil and gas for market researcher Frost & Sullivan: “It’s either stay with OPEC and tag along or leave OPEC and be by yourself.”

The bottom line: Saudi Arabia manages to impose its will on other members of OPEC, thanks to its ability to flood the market.