Somebody ought to tell the Japanese about MEW... they think we're rebounding:
"Order bookings are in line with our plan, so better than last year," Yasutaka Murata, the Kyoto-based company's chairman, said in an interview last week. "We are unable to accumulate inventories because of a high order intake."
Japan's companies are gearing up for resurgent demand from the U.S., the country's biggest export market, said economist Hiromichi Shirakawa.
U.S. Economy
"The business cycle has bottomed out, mainly because the U.S. economy is improving," said Shirakawa, chief economist at Credit Suisse Group in Tokyo. Shirakawa, a former Bank of Japan official, predicts an August rate increase.
I check in with the Asian markets before I go to bed... I did so tonight & the markets over there are going bonkers... at least up 'til now.
Yen's tanking & exports surging, equity markets are up, carry trade strong. All is right with the world. How does one spell BODACIOUS in kanji?
dryfly, maybe the consensus view is correct and the U.S. economy will pick up in the 2nd half of '07. Housing will get crushed - of course - but everything else will be OK. That seems unlikely to me. Sluggish growth, if not an outright recession, seem like more likely scenarios.
Excellent post. MEW started to decline in 2006. If PCE is just starting to...stabilize, you will easily calculate for how long does MEW impact consumer spending. At least economists can learn something during a downturn.
I suspect what we are going to see is what I argued when I first arrived at this site, that is that the housing impact is just going to just take too long to unfold to shock the economy into a recession.
The average spread in the market has gapped out 60 basis points recently...all the way to...wait for it...300 over. Read that again, 300 over. That's it. That is still incredibly tight by historical standards. There is lots of room for this market to correct more before we get within screaming distance of a collapse.
the housing impact is just going to just take too long to unfold to shock the economy into a recession.
Banker
I agree that this is the general model(as things are flat at best right now), but that if credit becomes an issue in CRE(which is looking that way) that's when the wheels fall off.
If that doesn't happen it's just stagnation as far as the eye can see; if CRE fails then it's recession with an unknown(but shorter) time horizon.
Great post as always. But that paper from Wells Fargo, not so great. Don't they have an Editing department over there? What's with the abuse of exclamation marks and question marks?!?!?
CRE and small C&I problems seem to be popping up all over from a ground-level view. It's rural and moving towards metro at a pretty fast pace.
There's another possible impact on PCE which no one is discussing, and that is the sudden need to put some cash by for FTHB. That's going to have an impact that will last over years and may produce an enduring change in consumer psychology for that cohort.
High inflation for basic consumer needs is also going to have an impact.
I would agree with Banker if effective consumer inflation were benign, but it isn't. The nasty combination of high consumer debt levels, a substantial group that is seeing stagnant or eroding real wages, broadly declining home values, tighter mortgage lending standards, and even mildly elevated interest rates is going to keeping throwing spanners into the consumption gears.
This situation - including the change involved in so much home-secured borrowing - took years to develop and was really driven by higher living costs in relation to wages. By 2005, even in rural areas, car mechanics and the like were buying homes either on spec (I-O, etc) or as a way to SUPPORT THEIR LIVING STANDARDS by enabling cheap future borrowing.
The two trends were linked on the way up and they will be linked on the way down.
The jist here is that rather than the smooth path that is more or less inevitable when forecasting GDP more than a couple of quarters out, the pile of difficulties stemming from more cautious lending and housing market troubles may mean a rough ride the next few quarters, along with slower than expected growth.
By the way, there is a tendency to set up a false dicotomy when discussing the economic outlook. The economy must be in great shape, or in recession. There is a middle ground, which our host has long seemed to expect, and which the Fed certainly has tried to engineer. It ought to be recognized that apparent pessimism may have as much to do with the point of view of the bullish reader as that of the writer. An expectation of middling growth, with the attendant uncertainties and unpleasantness, is not the same as an expectation of collapse.
The chart is very interesting for the long term trends shown there. If you apply some very long-term averaging, MEW has increased steadily since 1991. PCE has remained flat, with the 'bump' of the late 90's as the only exception.
To me, the chart says: MEW has steadily and increasingly become a part of PCE for 15 years now. My guess is that it has replaced growth in real wages and is why those have stayed flat for a decade and a half in an economy of increasing consumption.
It is quite likely that the global economy will do well as long as the carry trade is alive and well. Does it make sense to discuss just the US housing market without looking at what is going on in the global RE market.
"To me, the chart says: MEW has steadily and increasingly become a part of PCE for 15 years now. My guess is that it has replaced growth in real wages and is why those have stayed flat for a decade and a half in an economy of increasing consumption."
Quite right wally.
It has been shown, by CR and other, that MEWs have become a larger and larger part of consumers' spending income. It is that very fact, as we have become a nation of Gross Consumer Debt, that has allowed PCE to remain even.
The chart clearly shows this. If MEWs were not replacing wages, then the increase in MEWs would have meant an increase in PCE, not a flat PCE.
To not see this, one would have to be blind, stupid, or both. Which I think descibes most mainstream economist.
CR - At least the 2nd time you've trashed Well's dime store PHD analysis in recent memory... falls into the "fool me once" category. Need to take them off our "must read" list.
I guess their prof didn't expain to them the high correlation between ice cream sales and crime, either.
For the rest of us, I guess its time to stop relying on MEW and start back making money the old fasion way(s)... hard work and inheritance.
Putin and Abe need to sit down for a cunbaya session, aand have Japan redirect there export capacity to russia, and then raise there cb rate 500bps overnight
Excellent critique by CR on the Wells Fargo piece. One thing CR did not mention is that the graph compares PCE growth to the ratio of MEW to disposable income, which makes no sense. The ratio of PCE to disp. income might be compared to the ratio of MEW to disp income; or growth in PCE might be compared to growth in MEW. What is the reasoning behind comparing growth in PCE to the ratio of MEW to disp. income?
Thanks for the comments on Dr. Paulsen's piece. While I have long admired his thoughtful commentaries, I had trouble with this one. My anecdotal experience here in Northern California confirms your observation that expenditures of MEW lag the actual loan. I frequently heard borrowers say they would put the cash in the bank in anticipation of future bad times when the housing bubble turned and the credit window shut. Maybe the crowd is smarter than we think.
Off topic - did you see WSJs comments on housing stocks overpriced? Duh! The writedowns were strategically soft to appease wall street.
Here's what you do.. (sorry CPAs): Dust off the land acquisition model, put in sales prices at todays price and rate of sales, take out the appreciation that was in there, put in the new higher, longer carry costs and press F9 (calculate). What you get is a number lower than "cost or market" but its the new market price.
Double or triple those writedowns or there will be no margin coming.
Lets see, MEW declines, PCE same, consumer debt posts unexpected gain May (WSJ today) - sounds like consumer is using last source of cash - at least thats how it works in my house.
Somebody ought to tell the Japanese about MEW... they think we're rebounding:
"Order bookings are in line with our plan, so better than last year," Yasutaka Murata, the Kyoto-based company's chairman, said in an interview last week. "We are unable to accumulate inventories because of a high order intake."
Japan's companies are gearing up for resurgent demand from the U.S., the country's biggest export market, said economist Hiromichi Shirakawa.
U.S. Economy
"The business cycle has bottomed out, mainly because the U.S. economy is improving," said Shirakawa, chief economist at Credit Suisse Group in Tokyo. Shirakawa, a former Bank of Japan official, predicts an August rate increase.
I check in with the Asian markets before I go to bed... I did so tonight & the markets over there are going bonkers... at least up 'til now.
Yen's tanking & exports surging, equity markets are up, carry trade strong. All is right with the world. How does one spell BODACIOUS in kanji?
Its all nuts.
dryfly, maybe the consensus view is correct and the U.S. economy will pick up in the 2nd half of '07. Housing will get crushed - of course - but everything else will be OK. That seems unlikely to me. Sluggish growth, if not an outright recession, seem like more likely scenarios.
Best Wishes.
Its all nuts.
Definitely. It would all be entertaining as hell if the implications weren't so critically important.
CR- Sluggish growth, if not an outright recession, seem like more likely scenarios.
Yup, I agree completely. If the consumer walks away from the punch bowl, it's not going to be a slowdown.
Excellent post. MEW started to decline in 2006. If PCE is just starting to...stabilize, you will easily calculate for how long does MEW impact consumer spending. At least economists can learn something during a downturn.
By the way, I just learned what BODACIOUS means.
I suspect what we are going to see is what I argued when I first arrived at this site, that is that the housing impact is just going to just take too long to unfold to shock the economy into a recession.
We'll see.
Off Topic:
Still waiting for the junk market to collapse?
Bonds - WSJ.com
The average spread in the market has gapped out 60 basis points recently...all the way to...wait for it...300 over. Read that again, 300 over. That's it. That is still incredibly tight by historical standards. There is lots of room for this market to correct more before we get within screaming distance of a collapse.
the housing impact is just going to just take too long to unfold to shock the economy into a recession.
Banker
I agree that this is the general model(as things are flat at best right now), but that if credit becomes an issue in CRE(which is looking that way) that's when the wheels fall off.
If that doesn't happen it's just stagnation as far as the eye can see; if CRE fails then it's recession with an unknown(but shorter) time horizon.
Great post as always. But that paper from Wells Fargo, not so great. Don't they have an Editing department over there? What's with the abuse of exclamation marks and question marks?!?!?
Alec,
Don't you mean stagflation?
CRE and small C&I problems seem to be popping up all over from a ground-level view. It's rural and moving towards metro at a pretty fast pace.
There's another possible impact on PCE which no one is discussing, and that is the sudden need to put some cash by for FTHB. That's going to have an impact that will last over years and may produce an enduring change in consumer psychology for that cohort.
High inflation for basic consumer needs is also going to have an impact.
I would agree with Banker if effective consumer inflation were benign, but it isn't. The nasty combination of high consumer debt levels, a substantial group that is seeing stagnant or eroding real wages, broadly declining home values, tighter mortgage lending standards, and even mildly elevated interest rates is going to keeping throwing spanners into the consumption gears.
This situation - including the change involved in so much home-secured borrowing - took years to develop and was really driven by higher living costs in relation to wages. By 2005, even in rural areas, car mechanics and the like were buying homes either on spec (I-O, etc) or as a way to SUPPORT THEIR LIVING STANDARDS by enabling cheap future borrowing.
The two trends were linked on the way up and they will be linked on the way down.
"U.S. Rebound May Be Bumpier Than Fed Expects as Credit Tightens"
U.S. Rebound May Be Bumpier Than Fed Expects as Credit Tightens - Bloomberg.com
The jist here is that rather than the smooth path that is more or less inevitable when forecasting GDP more than a couple of quarters out, the pile of difficulties stemming from more cautious lending and housing market troubles may mean a rough ride the next few quarters, along with slower than expected growth.
By the way, there is a tendency to set up a false dicotomy when discussing the economic outlook. The economy must be in great shape, or in recession. There is a middle ground, which our host has long seemed to expect, and which the Fed certainly has tried to engineer. It ought to be recognized that apparent pessimism may have as much to do with the point of view of the bullish reader as that of the writer. An expectation of middling growth, with the attendant uncertainties and unpleasantness, is not the same as an expectation of collapse.
The chart is very interesting for the long term trends shown there. If you apply some very long-term averaging, MEW has increased steadily since 1991. PCE has remained flat, with the 'bump' of the late 90's as the only exception.
To me, the chart says: MEW has steadily and increasingly become a part of PCE for 15 years now. My guess is that it has replaced growth in real wages and is why those have stayed flat for a decade and a half in an economy of increasing consumption.
It is quite likely that the global economy will do well as long as the carry trade is alive and well. Does it make sense to discuss just the US housing market without looking at what is going on in the global RE market.
"To me, the chart says: MEW has steadily and increasingly become a part of PCE for 15 years now. My guess is that it has replaced growth in real wages and is why those have stayed flat for a decade and a half in an economy of increasing consumption."
Quite right wally.
It has been shown, by CR and other, that MEWs have become a larger and larger part of consumers' spending income. It is that very fact, as we have become a nation of Gross Consumer Debt, that has allowed PCE to remain even.
The chart clearly shows this. If MEWs were not replacing wages, then the increase in MEWs would have meant an increase in PCE, not a flat PCE.
To not see this, one would have to be blind, stupid, or both. Which I think descibes most mainstream economist.
CR - At least the 2nd time you've trashed Well's dime store PHD analysis in recent memory... falls into the "fool me once" category. Need to take them off our "must read" list.
I guess their prof didn't expain to them the high correlation between ice cream sales and crime, either.
For the rest of us, I guess its time to stop relying on MEW and start back making money the old fasion way(s)... hard work and inheritance.
Putin and Abe need to sit down for a cunbaya session, aand have Japan redirect there export capacity to russia, and then raise there cb rate 500bps overnight
Excellent critique by CR on the Wells Fargo piece. One thing CR did not mention is that the graph compares PCE growth to the ratio of MEW to disposable income, which makes no sense. The ratio of PCE to disp. income might be compared to the ratio of MEW to disp income; or growth in PCE might be compared to growth in MEW. What is the reasoning behind comparing growth in PCE to the ratio of MEW to disp. income?
CR,
Thanks for the comments on Dr. Paulsen's piece. While I have long admired his thoughtful commentaries, I had trouble with this one. My anecdotal experience here in Northern California confirms your observation that expenditures of MEW lag the actual loan. I frequently heard borrowers say they would put the cash in the bank in anticipation of future bad times when the housing bubble turned and the credit window shut. Maybe the crowd is smarter than we think.
Off topic - did you see WSJs comments on housing stocks overpriced? Duh! The writedowns were strategically soft to appease wall street.
Here's what you do.. (sorry CPAs): Dust off the land acquisition model, put in sales prices at todays price and rate of sales, take out the appreciation that was in there, put in the new higher, longer carry costs and press F9 (calculate). What you get is a number lower than "cost or market" but its the new market price.
Double or triple those writedowns or there will be no margin coming.
Lets see, MEW declines, PCE same, consumer debt posts unexpected gain May (WSJ today) - sounds like consumer is using last source of cash - at least thats how it works in my house.