Posts Tagged ‘oil prices’

Rick Mattoon on the Economy: On the Brink or On the Mend?

Tuesday, August 30th, 2011

Emerging from a financial crisis of the enormity that the United States has lived through the last several years, it is natural that the road to recovery is slower and bumpier than in a typical recession.  This is the opinion of Rick Mattoon, a Senior Economist and Economic Advisor at the Federal Reserve Bank of Chicago,  Previously a Policy Advisor to the governor of Washington, he is also a lecturer at the Kellogg School of Management at Northwestern University.

According to Mattoon, the irony of the Monday after Standard & Poor’s downgraded the United States’ credit rating from AAA to AA+ is that while the Dow Jones Industrial Average nosedived by 635 points, investors were still putting their money into Treasury notes.  Treasuries, which theoretically should have been affected by the credit downgrade, remain attractive to savvy investors.  The most significant impact of the credit downgrade is its effect on municipal bond issuances and the cost of certain kinds of credit that historically have been backed by the United States’ AAA standing.

From the Federal Reserve’s perspective, Mattoon says the central bank is going to continue making it easy for people to borrow and lend money to create the favorable conditions that will turn the economy around.  At present, he says the issue isn’t so much one of supply but demand.  A lot of people would like to take advantage of the current low interest rates, but can’t because they are not considered creditworthy due to tighter lending standards.  The Fed’s policy of quantitative easing (QE) has had some success, primarily — and until recently – the stock market rally and low interest rates.

The expression of “stall speed” is used to describe the pace of economic recovery as compared with the five percent rate of growth the country needs.  Mattoon says that this is a difficult process that has not been helped by other one-time shocks to the economy.  A case in point is March’s Japanese earthquake and tsunami, which caused supply-chain disruptions.  Another was the unanticipated spike in oil prices that dampened consumer spending.

The slow pace of job creation – just 117,000 created in July after two months of little employment growth – is also negatively impacting the economy.  The way the public sees it, job creation is currently the # 1 economic factor – particularly to the approximately 50 percent of the unemployed who have been jobless for six months or longer.

One game changer lies in the fact that Americans are currently saving more money than they did in the past – as much as six or seven percent of income when compared with a few years ago.

In terms of commercial real estate, the 1st half of the year saw tremendous amounts of capital raised for acquisitions, primarily for core $100 million transactions.  The market’s comeback depends on job growth.  According to Mattoon, if office employment ticks up, there will be greater demand for commercial real estate, especially in gateway cities like New York.  Retail will be the most difficult sector to recover, especially in strip malls, which were significantly overbuilt.  The demise of some big-box retailers – most notably Circuit City and Borders – is opening significant retail space that often anchored shopping centers.

To listen to Rick Mattoon’s full interview on whether the economy is on the brink or on the mend, click here.

icon for podpress  Rick Mattoon on the Economy: On the Brink or On the Mend?: Download

Is QE3 On the Horizon?

Tuesday, June 21st, 2011

Now that QE2 (quantitative easing 2) is winding down – and with the economy sputtering – will Federal Reserve chairman Ben Bernanke call for a new round of stimulus in the form of QE3? The answer likely is “no”, although it’s doubtful that the Fed will tighten monetary policy until the economy is stronger.  The central bank’s strategy has been to buy Treasury bonds to increase the money supply and foster growth.  The second round of such purchases, worth $600 billion, ends June 30.

Writing in the Washington Post, Neil Irwin says that “The lousy unemployment report comes on the heels of other disappointing economic data, but Fed officials view the current situation as different from the conditions that led to last year’s bond buying.  The recent round of data is neither alarming enough nor definitive enough to make them reconsider the unconventional monetary policy.  For one, much of the economic slowdown in the first half of the year was likely driven by temporary factors.  The Japanese earthquake and tsunami appear to have disrupted the supply chain at U.S. factories more than initial forecasts, contributing to the drop in manufacturing activity and May’s sluggish employment report.  And although oil prices spiked earlier in the year, they have ebbed downward since late April.”

Mohamed A. El-Erian, CEO and Co-CIO of Pimco, agrees, noting that “Notwithstanding the historical parallel, I suspect that it is very unlikely that there will be a QE3.  This view is based on an assessment of economic, political and international factors.  As Chairman Bernanke noted in his August Jackson Hole speech, and reiterated in his first press conference, policy measures should be judged in terms of the expected balance of benefits, costs and risks.  I suspect that there is now broad agreement that, in the case of QE3, this balance has shifted: lowering the potential gains and increasing the probability of collateral damage and adverse unintended consequences.  It is also clear that, in its attempt to deliver ‘good’ asset price inflation (e.g., higher equity prices), the Fed also got ‘bad’ inflation.  The latter, which essentially took the form of higher commodity prices, is stagflationary in that it imposes an inflationary tax on both production and consumption — thus countering the objective of QE2.”

There’s also the point that QE2 has had mixed results.  According to Bernanke, “Yields on 5- to 10-year nominal Treasury securities initially declined markedly as markets priced in prospective Fed purchases; these yields subsequently rose, however, as investors became more optimistic about economic growth and as traders scaled back their expectations of future securities purchases.  Equity prices have risen significantly, volatility in the equity market has fallen, corporate bond spreads have narrowed, and inflation compensation…has risen to historically more normal levels.”

Philadelphia Fed President Charles Plosser warns that QE2 provides excessive stimulus: The central bank has “a trillion-plus excess reserves,” he noted, which could be “the fuel for inflation.”  Anticipated inflation could explain the sudden increase in long-term yields that began last November.  But the rate for 10-year Treasury Inflation Protected Securities (TIPS), rose at the same time, which contradicts that interpretation.  At the same time, the five-year TIP rate didn’t rise.  Had that rate increased, there would have been a sign of a stronger economy in the next five years.


UBS thinks that QE2 failed and is strongly opposed to another round of stimulus.  Maury N. Harris, UBS’ Managing Director and Chief Economist for the Americas, says that “The evidence that QE2 boosted economic activity is lacking.  Yields moved higher and equity markets did as well, although the latter was justified by rising corporate earnings.  They importantly reflected better volumes, which probably cannot be traced to any believable instantaneous response to policy that works with a lag.  Despite the recent weakness in the data, we continue to view the recent slowing as insufficient to prompt further QE from the Federal Reserve.  Relative to conditions in August 2010, when QE2 was floated by Chairman Bernanke, labor market conditions are better.  Additionally, the threat of disinflation last fall has given way to a somewhat more disturbing build-up in inflation pressures as core inflation continues to accelerate.”

Global Financial Meltdown? Not in Norway

Tuesday, August 4th, 2009

One European nation has escaped the worldwide financial meltdown and recession.  It’s Norway, which saved its money – rather than spent – through the boom years. As a result of frugal financial management, Norwegian housing prices and consumption are on the upswing and interest rates are affordable.  Norway’s fiscal responsibility of its income from enormous oil and gas reserves has allowed the Scandinavian nation to build one of the globe’s largest investment funds.

norwayAfter large deposits of gas and oil were discovered in the mid-1970s, Norway didn’t go on a spending spree, and channeled its revenues into a state investment fund.  The government – with very few exceptions – can spend only four percent of those revenues annually.  “By the end of this year, I guess we are approaching $400 billion U.S.,” according to Amund Utne, a director general of Norway’s Finance Ministry.  Do the math, and that adds up to $400 billion in a nation whose population is 4.5 million.

Beyond its oil and gas revenues, strict banking regulations – tightened after a banking crisis in the early 1990s – shielded Norway from the credit crisis.  Norwegian banks made loans wisely and stayed away from exotic investments and financial products over the past decade.  “They (the United States) got all the bright guys to make all kinds of fantastic products.  Very creative.  And it turned out it was maybe not the best solution in the end,” Utne said, with typical Norwegian understatement.  “I think Norwegian banks are not as creative.  In this situation, it may be good to be somewhat boring.”

Norway also was immune from the housing bubble.  According to Bjorn Erik Orskaug of DnB NOR, Norway’s largest bank, “Housing prices are back up.  Consumption is up.  Banks are lending normally to the household sector and interest rates are staying low.”

Foreign Investors Like Luxury

Friday, October 24th, 2008

Volatile oil prices will minimally impact global air-freight growth over the long term, according to a Boeing Company report cited in a recent GlobeSt.com article.  The Chicago-based aircraft manufacturing giant’s Current Market Outlook 2008 predicts that growth will achieve an annualized average rate of 5.8 percent from 2007 through 2027.  Similarly, the report projects that the world freighter fleet will nearly double from 1,948 planes today to 3,892 over the next 20 years.

“The forecast is based on a number of factors, most significantly economic growth in diverse areas of the world,” said Jim Edgar, Boeing’s regional director, cargo marketing for Asia.  “Over the long term, global economic growth will drive demand for new, high-value products as well as seasonal perishables that people have become accustomed to enjoying.”

The report notes that the nature of the air-freighter fleet will change as larger aircraft increase their market share.  Currently, the largest freighters make up 26 percent of the market; in 20 years, that number will rise to 35 percent.  Fleet additions will include 863 new-production aircraft; 641 of those will be wide-body planes with the capacity to carry more than 80 tons.  The share of standard-body freighters (defined as having less than a 45-ton capacity with single-aisle body width) will fall from 39 percent to 35 percent over the next 20 years.

“We expect several trends to continue,” according to Edgar.  “Dedicated freighters will continue to provide an increasing proportion of air-cargo capacity, going to nearly 54 percent, and the industry will continue to move to larger airplanes.”

Economy Grows 3.3 Percent During 2Q

Wednesday, September 3rd, 2008

Contrary to the recent grim news about home foreclosures, bank failures, the credit crunch, rising unemployment rates, soaring oil prices, inflation and stock-market jitters, the United States’ economy — surprisingly — grew by 3.3 percent during the second quarter of 2008.

The economy grew at its fastest pace in nearly a year, thanks primarily to foreign buyers purchasing inexpensive U.S. exports, as well as the tax rebates that sent Americans on a shopping spree.

According to Commerce Department statistics, the GDP increased at a 3.3 annual rate from April through June.  This revised statistic represents a significant improvement over the initial 1.9 percent estimate, and exceeded economists’ expectations of a 2.7 percent growth rate.

The rebound was welcome news after two grim quarters.  The economy contracted during the last three months of 2007, and registered a feeble 0.9 percent growth rate during the 1st quarter of 2008.  Spring’s 3.3 percent performance was the best result since the third quarter of 2007, when the economy grew by an impressive 4.8 percent.

Still, the good news is something of a fluke.  The economy is still quite fragile, according to Federal Reserve Chairman Ben Bernanke, who recently warned that the weakness will remain throughout 2008.  Analysts expect the economy to hit another pothole during the 4th quarter, once the glow of the tax rebates dims.  Additionally, exports could decline if other nations experience similarly slowing economies.

Add presidential politics into the mix.  Democratic nominee Barack Obama favors a second government-stimulus package, while Republican John McCain supports free trade and other business measures to energize the economy.  With less than two months remaining until the election, the candidates are certain to have a lot more to say on how they plan to energize the economy.