Recovery?

Fed Chairmen (paternal or motherly)
Have made a depressing discovery:
If demand isn't great,
You can lower the rate
But you can't cut your way to recovery.

MBA Cost/Benefit Analysis

"When the market was anxious and tense,
An MBA seemed to make sense,
But a growth outlook that
Is still very flat
Makes B-school a lavish expense."

Business school applications have fallen 22% worldwide from last year's levels, apparently due to the uncertainty bred by prolonged economic weakness. The flaccid recovery makes the expense of an MBA, coupled with two years' foregone income, look like a risky bet. One exception: my alma mater, the Stanford Graduate School of Business, saw a 1.5% increase in applications. Stanford has re-emphasized the applicability of its management training to a broad range of business, public and social issues, perhaps tapping into a strain of idealism that looks beyond a weak economy. Then again, it could just be the proximity to $AAPL and $FB.

Fed Chairman's Remarks at Jackson Hole

"The data we had to exhaust
To show the recovery's lost
May allow me to ease
Now that everyone sees
That the benefit outweighs the cost."

The Economist's Greg Ip explains why Federal Reserve Chairman Ben Bernanke has waited so long to take action to accelerate the stalled US recovery: "Since Mr Bernanke could not escape criticism regardless of what the Fed did, tactically he was best served by waiting until the case for action was unambiguous, unsurprising and, most important, well articulated. The data have made the case unambiguous: employment and growth are weak and inflation by the Fed's preferred measure has edged down. By [the next FOMC meeting on] September 13th, it will certainly be unsurprising. Mr Bernanke's task today was to articulate the case."

See the link above for a comprehensive analysis of the Chairman's speech on Friday at the annual Kansas City Fed economic symposium at Jackson Hole, Wyoming.

Economic Driver

Sales of new vehicles, typically,
Recede in recession terrifically,
'Til recovery beckons,
And that's when, we reckon,
They amplify upswings pro-cyclically.

Courtesy of FT Alphaville, we learn that auto sales have comprised 30% of GDP growth in the last two quarters of our tepid, ongoing recovery. Mining a gem from the research of Credit Suisse economists, Alphaville spotlights an interesting insight:

Motor vehicle output is less than 3% of GDP. But its standard deviation is more than nine times the overall GDP’s standard deviation. So in the world of growth rates, the auto sector will tend to punch well above its weight in expansions (and well below during recessions).

To all those who would worry that the surge in US auto sales is unsustainable, Alphaville points out that, as shown in the accompanying graph, the seasonally adjusted auto sales volume is still below the level of typical recessions such as that of 2001.

So-So Employment Consensus

The employment report's understood
To say the economy could
Adroitly provide ways
To move along sideways,
But not ever get any good.

The ADP Employment Report will be released Wednesday morning at 8:15 and, though hotly anticipated, is not expected to be so hot. As shown in the graph, the disastrous employment losses of 2008-2009 have reversed and begun to recover, but not at a rate that would bring back full employment. The economists' consensus is for a gain of 183,000 jobs in April, down from the 209,000 increase in March. So-so, and trending lower. There is a possible upside surprise, though: Tuesday's better-than-expected ISM manufacturing survey, as well as recent regional surveys, point towards manufacturing job creation exceeding expectations.

Which Recovery Matters Most?

When the market was all of a-tatter,
To revive was a serious matter
In housing and jobs,
With the preference, obvs,
For the former ahead of the latter.

Q: If initial jobless claims fall less than expected, and the EU's economic sentiment indicator falls more than expected, how does the Dow react?
A: It jumps up by 100 points, provided that existing home sales rise more than expected.
The National Association of Realtors said on Thursday that its seasonally adjusted index for pending sales of existing homes jumped 4.1% from the previous month, vs. the 1.3% increase expected by economists. On the strength of this news, and against the headwinds from the US hiring slowdown and the European malaise, the Dow Jones Industrial index rose 114 points, or 0.9%, to reach 13,205. Investors evidently believe that the first sign of a US recovery will be in the housing market, whence all of our financial crisis troubles have come.

A Crude Iranian Conflict

If an outbreak of Persian hostility
Brings petroleum price volatility,
The economy's cooling
From trouble in fueling
The engine of upward mobility.

Tensions with Iran over its nuclear program have introduced a new round of uncertainty into global strategic affairs, but one thing is definite: if Iranian supply is taken off the market, rising oil prices would impinge on almost every aspect of the US economy. Higher gasoline prices would cause consumers to cut back on discretionary spending, as most have a limited ability to cut back on driving. Manufacturers would be hurt both from higher delivery costs as well as higher prices for plastics and other petroleum-based materials. Even many service industries maintain fleets of vehicles and would feel the effects of a Persian Gulf conflict. The one bright spot at this point is that the prospect of $4.50 gasoline, as in 2008, appears as yet remote.

It's Your Turn

Said Bernanke, recounting the facts,
While deflecting some Red-State attacks:
"The Fed did our part;
It's on Congress to start
To simplify filing one's tax."

Fed Chairman Ben Bernanke addressed the Congressional Joint Economic Committee on Tuesday, and told them that they and their colleagues must work together with the White House to renew the "close to faltering" American economy. His suggested Congressional to-do list includes finding a permanent solution for Fannie Mae and Freddie Mac; easing mortgage refinancing while enabling banks to rent out foreclosed properties; and simplifying the US tax code. At the same time, he dismissed the ever-more-frequently heard Republican criticism that, by keeping interest rates low, the Fed is enabling federal budget deficits. "I don't think that's a valid point," retorted the Chairman.

Not Working

Said Krugman, with skeptical wince:
"Employment just doesn't convince;
Though it tumbled off greatly
In 2008, we
Have seen no recovery since."

As a guest on the Charlie Rose program last week, Princeton's Nobel Prize-winning economist Paul Krugman poured cold water on the notion that the recovery is slowing, inasmuch as he does not believe there has been a recovery at all. Despite improvements in the official unemployment rate, notes Dr. Krugman, the percentage of adults actually employed has not increased. This apparent contradiction is explained by the "discouraged job seeker" effect, in which those who stop actively looking for work are no longer counted as unemployed.

* * *

A new page has been added to Limericks Économiques: "Dr. Goose and Mad Kane."  Please visit this page for the best in Dr. Goose's contributions to "Mad Kane's Limerick-Offs;" blogger Madeleine Begun Kane supplies the opening line, and verse-writing hopefuls compete to see who can best complete it. Warning: some of the verses are a little spicy (if not too raw).

Too Small to Prevail

The diminutive banks in the land  
May be showing less profit than planned,  
If for growth they're depending  
On small-business lending,  
For which there is flagging demand.    


Kelly Evans writes in the Journal's Ahead of the Tape that smaller banks do not appear set to report the earnings improvements that the largest banks generally have of late.  The chief reason for this disparity is the smaller banks' greater dependence on lending, which has been slow to recover from the financial crisis.

Consumer of Last Resort

A recovery study, right clever,
Showed consumers need time to delever;
So, for growth to begin,
Uncle Sam must step in  
And stimulate, right now, or never.   

The Economist's Free Exchange blog cited a recent study by the Federal Reserve Bank of San Francisco: researchers Atif Mian and Amir Sufi showed that residential investment was quicker to recover in counties with low average household debt than in more highly indebted counties. From this, the authors conclude that, with the US consumer generally highly indebted, lower taxes or interest rates would not suffice to stimulate economic growth; government must step in as the consumer of last resort. This space would add that the nation's infrastructure is in sad shape, and its renewal would bring double benefits.

Not Enough Firepower

Said Bernanke, "I wish there were eight of me
To confront unemployment creatively;
In our current position,
We lack ammunition
To ease into growth quantitatively."   

"Economists React: Fed Prepares for 'Gnarly Ride'," by Phil Izzo of the Wall Street Journal's Real Time Economics, surveys a broad swath of economists' opinions as to the Fed's ability and willingness to stimulate GDP with quantitative easing (the purchase of Treasury bonds).

Whither the King?

U.S. growth was once buoyant and bubbly,
And by turns became dismal and ugly;
Now the world's in suspense,
As it's poised on the fence
'Twixt resurging, or bottoming doubly.