Thursday, May 26, 2016
Business Investment Lags, but Housing Sales Surge [feedly]
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Business Investment Lags, but Housing Sales Surge
// NYT > Business
Business spending intentions weakened in April for a third month, but jobless claims fell and pending home sales reached a 10-year high.
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Obama races to cement the big Pacific Rim trade deal that all his potential successors oppose [feedly]
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Obama races to cement the big Pacific Rim trade deal that all his potential successors oppose
// L.A. Times - Business
President Obama is racing against the clock to cement a massive Pacific Rim trade deal that all of his potential successors oppose, with his administration eyeing a looming fight on Capitol Hill while starting to implement as much of the complicated pact as it can.
The effort begins in Vietnam,...
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The Atlanta Fed Wage Tracker: What’s it saying re wage growth and the Fed? [feedly]
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The Atlanta Fed Wage Tracker: What's it saying re wage growth and the Fed?
// Jared Bernstein | On the Economy
As OTEers know, I track various measures of wage and compensation growth. Five—count 'em!—show up in the wage mashup, recently updated.
One increasingly popular series I've not included is the Atlanta's Fed Wage Tracker (FWT). It's an interesting and useful contribution, so let me make a few points about this series: what it shows, why it doesn't belong in the mashup, and importantly, given that it's accelerating faster than other series, what it says about wage-push inflation.
The figure below shows the most recent version of the FWT. While my mashup was last seen growing at around 2.3%, the FWT is popping along at 3.4%. Whussup widdat?
Source: Atlanta Fed
In fact, it's a very different beast from all the other series, with two major differences (I first saw this approach in a Jesse Rothstein paper from a few years back). First, while all the other series take snapshots of wages in period 1 and compare them with snapshots from period 2, the FWT measures the growth of the same workers over 12 months. If Jane earned $10 in April of 2015 and $10.50 in April of 2016, her wage growth is recorded as 5%. In the "snapshot" series that we're more used to, Jane's wage growth is not tracked. We're just comparing averages or medians of a sample of all wage earners (or blue-collar workers, or whatever) in two different periods.
By looking at continuously employed workers (actually, workers employed in both time periods), the FWT will typically show more growth than other series, since it's including an "experience premium," the bump to wages some workers enjoy as they age (or, similarly, as they add another year of tenure at their job).
The FWT is also, and this is an important attribute, less susceptible to compositional or demographic changes. If an improving job market pulls in a bunch of low-wage workers, the snapshots will reflect slower wage growth than the FWT, which excludes new entrants. This recent analysis by economists at the SF Fed shows this cyclical dynamic, along with a secular one of aging boomers leaving the job market (which also tends to push down wage growth since these leavers have higher wages), to be in play in the current wage-growth story.
The second unusual aspect of this wage series is that the median plotted above is not the median wage. It's the median growth rate. They calculate the wage growth of people like Jane who were working in the survey over the course of a year, and construct a distribution of growth rates from which they plot (a 3-mo. moving average of) the median. That means the median growth rate in any given month could be for low-, high-, or mid-wage workers.
So, besides the findings from the SF Fed re the impact of secular and cyclical trends holding back the broad measures of wage growth with which we're more familiar, is there anything else to learn from this series? We know that continuously employed workers, especially full-timers, are more likely to experience wage growth than others, so the fact that this series grows faster than the mashup isn't surprising.
But is columnist Robert Samuelson correct to conclude that these findings should exert "pressure on the Fed to raise interest rates," as they reveal a tighter job market goosing wages more than we thought?
The SF Fed authors suggest maybe not: "As long as employers can keep their wage bills low by replacing or expanding staff with lower-paid workers, labor cost pressures for higher price inflation could remain muted for some time." They do, however, note that if low-wage entrants are "less productive," that could create inflationary pressures.
I examined such linkages in a recent post wherein I argued that any pass-through from wage growth to price growth was awfully hard to tease out of the data, even controlling for slower productivity growth. Using a simple method I describe in the post, "I simulate an increase in the wage variable and estimate the impact on price growth."
Let's apply that same test to the FWT.
The first figure shows that a one standard deviation spike in the FWT wage growth series has no impact on core PCE inflation over the course of the next 12 months. The second figure shows the same result for full-time workers.
Source: See data note.
Source: See data note.
This shouldn't surprise you. A look at the first figure above shows that even FWT wage growth remains below where it was in the full employment 90s and even the less full 2000's. If anything, this measure shows we're still pretty far from full employment. Moreover, there's increasing evidence that wage-push inflation isn't so much of a thing as it used to be.
So, happy to add the FWT to the mix, but a) it's not signaling inflationary pressures, and b) once you extract its built-in premiums, I don't think it's telling a very different story than the mashup series. The job market's tightening, and that's giving workers a bit more bargaining clout to push for wage gains. To which I say: it's about time!
Data note: The statistical analysis uses monthly, year-over-year percent changes in the core PCE deflator and the FWT. These are run through a VAR (vector autoregression) with 6 lags of the price and wage variables, and one control variable: the annual change in the broad trade-weighted index of the dollar. The figures show impulse-response functions of a one standard deviation shock in the wage variables on the price index (PCEC), with confidence bands of two standard errors.
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Rising Latin American Corporate Risk: Walking a Tightrope [feedly]
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Rising Latin American Corporate Risk: Walking a Tightrope
// iMFdirect – The IMF Blog
By Carlos Caceres and Fabiano Rodrigues Bastos
Versions in Português (Portuguese) and Español (Spanish)
The rapid increase in Latin American corporate debt—fueled by an abundance of cheap foreign money during the past decade—has contributed to an increase in corporate risk. Total debt of nonfinancial firms in Latin America increased from US$170 billion in 2010 to US$383 billion in 2015. With potential growth across countries in the region slowing, in line with the end of the commodity supercycle, it will now be more difficult for firms to operate under increased debt burdens and reduced safety margins.
In this environment, Latin American firms are walking a tightrope. With external financial conditions tightening, the walk towards the other side—notably through adjustment and deleveraging—while necessary, has become riskier. After making good progress, the crossing has also become more perilous due to strong headwinds—including slower global demand and bouts of heightened market volatility.
In our most recent regional report, and in a companion working paper, we take a deeper look at the factors driving corporate risk in Latin America over the last decade. We use company-specific financial information for close to 500 publicly listed nonfinancial firms between 2005–15 in 7 major economies—Argentina, Brazil, Chile, Colombia, Mexico, Panama, and Peru. We then gauge the main factors driving corporate risk dynamics in the region. We analyze company-specific, country-specific, and global conditions and the factors contributing the most to the recent rise in corporate risk.
Warning signs
The data shows that corporate risk, as reflected in higher credit default swaps (CDS) spreads, has indeed been rising in 2014–15 (Figure 1), though only in the cases of Argentina and Brazil has it approached the levels observed during the global financial crisis. Interestingly, but not surprisingly, the peak year in most commodity prices (2011) marks the beginning of risk differences across countries, which have further widened since late 2014.
Our results show the following:
All dimensions—company-specific, country-specific, and global factors—play a role in driving corporate risk, albeit to varying degrees and with different implications across countries. Overall, macroeconomic domestic factors, particularly the pace of currency depreciation and changes in sovereign spreads, are key direct factors placing upward pressure on corporate risk since 2011 (Figure 2). External conditions—in particular measures of global risk aversion (such as the Chicago Board Options Exchange Volatility Index, VIX)—constitute a dominant driver of corporate risk. Stress tests indicate that external shocks can generate substantial increases in corporate risk across the region—ranging from 100 to almost 300 basis points in the event that the VIX surges to just half of the spike observed during the global financial crisis.
Domestic macroeconomic and political factors have played a particularly important role in generating upward pressures on corporate risk in Argentina and Brazil through rapid exchange rate depreciation and an increase in sovereign CDS spreads—reflecting significant macroeconomic imbalances (Figure 3). Higher corporate vulnerabilities in Colombia have been driven by the large exchange rate depreciation, as well as deteriorating firm-specific factors. The latter has also generated upward pressure on corporate spreads in Peru. In contrast, Chile, Mexico, and Panama have experienced much lower pressures on corporate risk from domestic economic factors. Across these major Latin American economies, benign global financial conditions (in particular, low market volatility) have helped to contain corporate risk despite an environment of slower external demand and declining commodity prices.
Minimizing risk
The soundness of policy frameworks matters for corporate risk. Indeed, given the important link between corporate and sovereign spreads, macroeconomic stability and credible policies are an important defense against additional upward pressures on corporate spreads. For instance, reining in risks to fiscal sustainability as well as curbing inflation, particularly in Argentina and Brazil, is crucial to contain corporate risk.
Recognizing the importance of global factors in driving corporate risk at home, solid macroeconomic policies alone, however, may not be enough and supporting underlying microeconomic adjustments are also imperative. This means promoting firms' capacity to push through needed adjustments. In particular, orderly deleveraging through market-based solutions should be the first line of defense in highly indebted companies. Public sector equity should not be used to stave off needed adjustments in the corporate sector. In the case of insolvent companies, restructuring and bankruptcy legislation should minimize both administrative costs and economic losses related to default.
Finally, enhanced monitoring and supervision and well-targeted macroprudential policies are key to alleviate risks and spillovers, particularly to the financial system. Policymakers should monitor closely corporate balance sheets and income flows, particularly in systemically important nonfinancial firms. Financial regulators also have a critical role to play. Adequate consolidated supervision, particularly in cases where financial and nonfinancial firms are highly interlinked, remains an important risk-mitigating tool.
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GAO report on segregation misses the bigger picture [feedly]
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GAO report on segregation misses the bigger picture
// Economic Policy Institute Blog
Last week, the Government Accountability Office (GAO) issued a misleading report on school segregation, which I discussed with NAACP Legal Defense Fund President Sherrilyn Ifill and others on the Diane Rehm Show.
The takeaway line of the GAO report was:
From school years 2000-01 to 2013-14, the percentage of all K-12 public schools that had high percentages of poor and Black or Hispanic students grew from 9 to 16 percent.
(When the GAO referred to "poor" students, it was not really speaking of poor students, but rather of those from families with incomes less than nearly twice the poverty line and who are eligible for subsidized lunches in schools.)
Not by coincidence, the GAO report was released on Tuesday, May 17, the 62nd anniversary of the Supreme Court's Brown v. Board of Education decision banning school segregation. So it was not unreasonable for those who did not read the GAO report very carefully to conclude that it described a dramatic increase in racial segregation over the last 13 years.
But it did not, and could not.
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