WSJ: A yuan for your thoughts, Janet?

Last week saw a whole array of opinions, outrage (misguided, genuine or contrived) and interminable commentary on the implications of China’s actions earlier last week while still maintaining the status of [just shy of] currency manipulators by the U.S. executive branch. Earlier this week in the Journal, China Moves to Devalue Yuan:

China’s yuan has been on an upward track for a decade, during which the country’s economy grew to be the second largest in the world and the currency gained importance globally. The devaluation Tuesday was the most significant downward adjustment to the yuan since 1994, when as part of a break from Communist state planning, Beijing let the currency fall by one-third.

China sets a midpoint for the value of the yuan against the U.S. dollar. In daily trading, the yuan is allowed to move 2% above or below that midpoint, which is called the daily fixing. But the central bank sometimes ignores the daily moves, at times setting the fixing so that the yuan is stronger against the dollar a day after the market has indicated it should be weaker.

With Tuesday’s move, the fixing will now be based on how the yuan closes in the previous trading session. As a result, the yuan’s fixing was weakened by 1.9% Tuesday from the previous day, leaving it at 6.2298 to the U.S. dollar, compared with 6.1162 on Monday. The yuan dropped as much as 1.99% from its previous close to 6.3360 against the dollar in Shanghai and fell as much as 2.3% in Hong Kong in early trading.

Ironically, this move was ostensibly to allow the market to play a greater role in the value of China’s currency. But contra to this view:

“The real proof in whether this change is about reform or growth will come when authorities resist the urge to intervene down the road when another policy goal that could be achieved by a significant revaluation or devaluation comes knocking,” said Scott Kennedy, an analyst at the Center for Strategic & International Studies, a Washington think tank.

“China wasn’t able to resist that urge on the stock market, so the government doesn’t get the benefit of the doubt on this quite yet,” Mr. Kennedy said, a reference to China’s recent moves to prevent further declines in its equities markets.

What about Inflation?

In an opinion post, Rate Watchers Read the Chinese Tea Leaves, the authors makes an interesting point regard another variable that could complicate matters:

Speaking before and after the step, respectively, Atlanta and New York Federal Reserve Bank presidents Dennis Lockhart and William Dudley cast doubt on the notion that run-of-the mill macroeconomic turbulence would delay a September increase. And a survey of 60 economists by The Wall Street Journal conducted mostly before China’s bombshell showed that 82% expected an increase next month.

But what about its effect, at the margin, on a critical set of U.S. economic data? Namely, inflation. Friday’s producer-price index and Wednesday’s consumer-price index will be the penultimate readings before the big decision.

…With markets recovering somewhat from the shock, China’s move probably won’t delay a September hike. But its contribution to slower price gains overall could slow the pace of Fed tightening.

 See more analysis here:


American Customer Satisfaction Index and the Economy

The ACSI Measurement Model

If you are not familiar with the American Customer Satisfaction Index (ACSI), it is a unique organization that engages in “national cross-industry measure of customer satisfaction in the United States,” as well as user satisfaction with public agencies:

This strategic economic indicator is based on customer evaluations of the quality of goods and services purchased in the United States and produced by domestic and foreign firms with substantial U.S. market shares. The ACSI measures the quality of economic output as a complement to traditional measures of the quantity of economic output.

In addition to its extensive coverage of the private sector, the American Customer Satisfaction Index (ACSI) benchmarks citizen satisfaction for a multitude of federal agencies and departments, as well as two high-usage services of local governments (police and solid waste management). In 1999, the federal government selected the ACSI to be a standard metric for measuring citizen satisfaction. Now, over a decade later, ACSI coverage of federal government continues to grow. All told, the ACSI measures citizen satisfaction with over 100 services, programs, and websites of federal government agencies.

For both government and private-sector measurement, the ACSI uses customer interviews as input to a multi-equation econometric model. Customers’ responses about a government agency are aggregated to produce its ACSI benchmark, thus results are specific to each individually measured organization. Because most agencies do not deal in economic transactions in a strict sense, the ACSI government model includes outcomes appropriate to the public sector in lieu of price-related measures.

See the full ACSI benchmarks and reports for all industries (including government) here.

Why does this matter?

The most obvious use of the ACSI econometric measurements is to provide a field poll assessment of the mood of the marketplace. It almost functions like backend support for marketers. But more interesting is the potential tie to economic activity:

ACSI’s time-tested, scientific model provides key insights across the entire customer experience. ACSI results are strongly related to a number of essential indicators of micro and macroeconomic performance. At the micro level, companies that display high levels of customer satisfaction tend to have higher earnings and stock returns relative to competitors. At the macro level, customer satisfaction has been shown to be predictive of both consumer spending and gross domestic product growth (click image for enlarged view).

ACSI National Q12015

It is interesting to compare these results with a general reading of the overall economy, such as the U.S. Economy in a Snapshot by the Federal Reserve Bank of New York, where the assessment of consumer behavior is that “spending remains tepid.” This is in agreement with an article (contrarian tone) in the Investor’s Business Daily by the ACSI’s founder from earlier this year:

Despite a flurry of good economic news, the U.S. recovery, while better than just about any other country at the moment, will not gain much momentum unless there is a substantial increase in consumer demand.

Following the February jobs report, which showed better-than-expected employment growth, many economic commentators contend the economy is poised for sizable expansion in the near future, perhaps by as much as 4% or better…But neither is likely unless consumer spending strengthens substantially. In fact, spending growth probably needs to double in order for the economy to take off.

What is particularly interesting is the correlation the IBD makes to consumer satisfaction and meager wage growth. We can understand wage growth and discretionary income, but the link to consumer satisfaction may not be as easily recognizable:

Except for nondiscretionary spending, which only increases proportionally to population growth, consumers need a reason to spend and the means to do it. Recent data from the American Customer Satisfaction Index (ACSI), which measures the quality of economic output from the perspective of the user of that output, show that customer satisfaction in the U.S. is down for a fourth consecutive quarter.

It is not that consumer standards or expectations are now higher somehow. Rather, consumers are finding the shopping and consumption experience less satisfying. Too many companies have been unable to create a satisfied customer, which, according to the late Peter Drucker, is the fundamental purpose of business.

The article concludes, from a different perspective that until there is pent up consumer demand, the modest gains (at best) are what will continue.

Volume at the Ports and Twenty Years of Trends

While the ports of Long Beach and Los Angeles have trends that are somewhat at parity with one another, they certainly do not necessarily move in tandem. Which is probably the self-obviating point of different cargo. That said, I thought it would be interesting to plot the last twenty years of activity for the two ports. The Port of Los Angeles gets a little more granular with their posted statistics, but for the purpose of comparison, both data sets for the two interactive charts were set up consistently.

May showed the following shipment activity at the Port of Los Angeles:

Containerized cargo volumes edged up .8 percent compared to the same period last year. The Port handled a total of 694,791 Twenty-Foot Equivalent Units (TEUs) in May 2015…Imports decreased .8 percent, from 351,403 Twenty-Foot Equivalent Units (TEUs) in May 2014 to 348,427 TEUs in May 2015. Exports declined 3.5 percent, from 158,473 TEUs in May 2014 to 152,917 TEUs in May 2015…Factoring in empties, which increased 7.9 percent, overall May 2015 volumes (694,791 TEUs) increased .8 percent. For the first five months of 2015, overall volumes (3,181,718 TEUs) are down 4 percent compared to the same period in 2014.

Mouse over the charts to see the underlying data, or select/de-select items from the legend:

Port of Los Angeles Container Trade TEUs

On the other hand, the port of Long Beach had the following swing in activity:

Cargo rose at the Port of Long Beach by 6 percent in May, the third consecutive month of growth, the busiest month since October 2007, and the busiest May since 2006. A total of 635,250 TEUs (twenty-foot equivalent units) of containerized cargo were moved through the Port in May. Imports numbered 327,317 TEUs, a 4.8 percent increase from the same month last year. Exports decreased 7.4 percent to 135,855 TEUs. Empty containers rose 22.6 percent to 172,078 TEUs. With imports exceeding exports, empty containers are sent overseas to be refilled with goods.

Port of Long Beach Container Trade TEUs

This is a welcome surge of activity as the fiscal year to date measurement of cargo is still lightly contracted from 2014. The Port of Long Beach attributes some of the volume to be due to a “stronger retail market,” as well as added activities and services “in order to boost cargo growth.”

The Marginally Attached – A Look at the Five Largest States

The U.S. Bureau of Labor Statistics (BLS) defines marginally attached in simple, straightforward language:

Marginally attached workers
Persons not in the labor force who want and are available for work, and who have looked for a job sometime in the prior 12 months (or since the end of their last job if they held one within the past 12 months), but were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey. Discouraged workers are a subset of the marginally attached.

Discouraged workers
Persons not in the labor force who want and are available for a job and who have looked for work sometime in the past 12 months (or since the end of their last job if they held one within the past 12 months), but who are not currently looking because they believe there are no jobs available or there are none for which they would qualify.

For the purpose of illustration, the FRED graph below has the top five states  selected (which accounts for more than a third of the nation’s population), showing the trend of marginally attached workers for more than a decade.

The trend lines show the inherent headwinds since the beginning of economic recovery in June 2009. The still “on the grid” numbers of the marginally attached and discouraged workers has hung on much longer than a decade ago. What’s more, six years into recovery, not one of these states has returned to its pre-recession level of the marginally attached:

Marginally Attached-Pre-Recession

This could be due in part to an aging population as well as population shifts and growth in general. This also illustrates why for so many, the recovery has not felt like a recovery. The reality is, jobs are being added as illustrated by the decreased levels of the marginally attached from the corresponding peak levels by state (peak levels were between July 2010 and October 2011):

Marginally Attached Percentage Below Peak Levels

Retail: The Front Page of our Economy

The National Retail Federation has provided an excellent (and large, 141 pages) study produced by PwC that shows the profound implications of retail on our overall economy. The report makes some bold claims, “according to the study, retail is the largest private employer in the United States. Retail directly and indirectly supports 42 million jobs, provides $1.6 trillion in labor income and contributes $2.6 trillion annually to U.S. GDP.”

Small Things Add Up

The report also has a lot to say about main street in America. With over 42 million jobs supported directly or indirectly the result of retail, and it may come as a surprise to learn that the majority of retail establishments making up the 29 million jobs are actually small businesses, “this report also makes clear that retail is American small business. An overwhelming majority of retail businesses – 99% –employ fewer than 50 people. In fact, these retailers provide 40 percent—or 11.5 million—of the 29 million jobs in retail.” See the industry comparison in the graph below (click for full size):

Direct Employment by Industry

Impact on the NAICS Cateogories – Top 5 by GDP

The interactive chart below shows the impact by category as tracked by the Census Bureau. The full table can be viewed here and is part of the report. Mouse over each data point to see the impact on the measurements of number of jobs, labor income, number of retail establishments and total GDP. Or select/de-select items from the legend:

Top 5 Retail NAICS Categories by GDP (2012)

Below is a well done 95 second overview of the highlights produced by the National Retail Foundation.


What is causing the slump in productivity?

According to the World Bank in the World Development Indicators section of data, the organization’s aggregate measurement of the business lending rate is as follows,

The lending rate is the bank rate that usually meets the short-and medium-term financing needs of the private sector. This rate is normally differentiated according to creditworthiness of borrowers and objectives of financing. The terms and conditions attached to these rates differ by country, however, limiting their comparability.

The graph below is a look at lending in the United States in the last twenty years.

World Bank Lending Rate

The same trend is substanciated by the FRED data set, Weighted-Average Effective Loan Rate for All C&I Loans, All Commercial Banks:

So money is still remarkably cheap. But what about capital investment, and its effect on productivity? Unfortunately, productivity is at a mysteriously low level as shown by the following FRED data. Notice the flattening trend in the last several years, after what started as a normal looking upward trend at the beginning of the last (and current) recovery:

A number of recent articles have drawn attention to this. One, in the Wall Street Journal, The Mystery of Declining Productivity Growth concludes that while certain hypotheses are plausible or even tenable (such as declining capital investment), we really do not fully understand why the overall decline in productivity:

How dry and how lately? I prefer to date the slowdown in productivity growth from the end of 2010 because productivity growth (in the nonfarm business sector) averaged a bountiful 2.6% per annum from mid-1995 through the end of 2010, but only a paltry 0.4% since. Other scholars prefer earlier break points. For example, productivity growth averaged 2.9% from mid-1995 through the end of 2005, but only 1.3% since. Either way, the drop is large, and the scary thing is that we don’t understand why.

Many current assessments point to the lack of capital investment, opting for the repurchasing of stock in order to boost earnings per share. In some cases, even accessing some of that cheap money in order to repurchase common stock. In another recent article in the Wall Street Journal, Behind the Chronic Weakness of Capital Investment draws an even stronger correlation between productivity and capital investment:

In 2014, real gross domestic product was 8.7% above the level it reached just before the onset of the great recession in late 2007, according to the Bureau of Economic Analysis (BEA), yet gross private investment was just 3.9% higher. Private investment net of depreciation—an even better measure of keeping up production and innovation capacity—was $524 billion in 2013 (the last year for which we have good data), compared with $860 billion in 2006.

The impact of weak capital investment is partially revealed by the slowdown in productivity growth. Bureau of Labor Statistics data show that labor productivity grew at an average rate of just 1.5% a year between 2005 and 2014, and by 0.7% a year since 2011. These numbers compare poorly with the average annual growth rates of 3.3% between 1948 and 1973, and 3.2% between 1996 and 2004. Business formation and venture capital funding have also slowed in recent years.

The article cites a number of interesting possibilities, but again, hypotheses (including “uncertainty”) followed by no certainty for the exact reason for the decline in productivity, but the conclusion is grave, “given its importance to productivity, economic growth and rising living standards, it is well worth the efforts of political and economic leaders to find a path to constructive change.”

Washington Super Sizing Bank Boards Oversight

In yesterday’s Wall Street Journal, Regulators Intensify Scrutiny of Bank Boards outlined many of the problems inherent in bank boards, especially in the wake of the great crash of 2008 when the banking industry was exposed for just how risky and reckless a business it always has been, versus the illusion of prudence, conservatism and moderation. The result has been increased layers of oversight, now with final authority in Washington:

The Federal Reserve and other bank regulators are holding frequent, in some cases monthly, meetings with individual directors at the nation’s biggest banks, demanding detailed minutes and other documentation of board meetings and singling out boards in internal regulatory critiques of bank operations and oversight. In some instances, Fed supervisors meet more often with directors than the directors meet formally as a full board. Boards at small banks are also getting new attention from regulators.

But while the “2008 crisis showed regulators that some boards—and senior management—didn’t understand the risks firms were taking or didn’t exercise appropriate oversight,” additional problems may not be where you expect them:

In some cases, board members weren’t experienced enough or were too closely tied to the bank to perform their duties. Studies since the financial crisis—for example, the International Monetary Fund’s October 2014 Global Financial Stability report— have shown banks with independent directors are less likely to take on risk, while boards chaired by the bank’s CEOs take more risk.

As a result, the Office of the Comptroller of the Currency has turned its attention to bank boards and their activities as they specifically address risk, as well as their understanding of the activity their institutions are engaged in, resulting in “more supervisory contact with the boards than ever before.” According to the head of bank supervision at the Federal Reserve Bank of New York, “while the level of engagement varies across firms, in general, we are seeing boards being more active in asking questions, providing oversight of management and engaging with supervisors.”

Will it work? See two articles in the Financial Times from last year that may suggest otherwise: A reckless banking industry is a drag on the economy and Financial reforms will make the next crisis even messier.

Another Volume Surge at the Port of Los Angeles

Significant volume burst of activity at the Port of Los Angeles with a rise in containers of 9% which is the “strongest month since August 2006,”

Total cargo for September was 775,133 Twenty-Foot Equivalent Units (TEUs). It’s the busiest single month at the Port since August 2006. The increased volume reflects peak season volumes and larger vessels calling at the Port of Los Angeles.

Container imports increased 11 percent, from 370,786 TEUs in September 2013 to 411,507 TEUs in September 2014. Exports rose 0.20 percent, from 150,380 TEUs in September 2013 to 150,679 TEUs in September 2014.

Combined, total loaded imports and exports increased 7.9 percent, from 521,166 TEUs in September 2013 to 562,185 TEUs in September 2014. Factoring in empties, which increased 12.2 percent year over year, overall September 2014 volumes (775,133 TEUs) rose 9 percent compared to September 2013 (710,892 TEUs).

For the first nine months of calendar year 2014, overall volumes (6,302,470 TEUs) have increased 7.8 percent compared to the same period in 2013 (5,847,167 TEUs).

Year to date at a glance is as follows (select the table for full size):

2014-10-16 POLA

This seems a little contra to this week’s census data,

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for September, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $442.7 billion, a decrease of 0.3 percent (±0.5%)* from the previous month, but 4.3 percent (±0.9%) above September 2013.

And this from Logistics Management,

With the holiday shopping set to gear up in a few weeks, it looks like the retail sector could use a seasonal spark based on declining retail sales in September, according to data issued by the United States Department of Commerce and the National Retail Federation (NRF).

Commerce reported that September retail sales at $442.7 billion were down 0.3 percent compared to August and up 4.3 percent compared to September 2013, and total retail sales from July through September are up 4.5 percent annually.

The NRF said that September retail sales, which exclude automobiles, gas stations, and restaurants, dipped 0.1 percent seasonally-adjusted month-to-month and increased 4.6 percent annually on an unadjusted basis.

“Retail sales were surprisingly weak in September,” NRF Chief Economist Jack Kleinhenz said in a blog posting. “Despite increasing consumer confidence, an uptick in employment, lower gas prices, and with inflation in check, consumers still slowed spending. Reconciling consumer confidence with consumer spending continues to be a challenge.”

But it may very well be a different set of expectations in terms of retailer sentiment as they gear up for the holiday season.

A Rough Assessment of Greenspan’s Career

Barry Ritholtz has written an assessment of Greenspan’s career which spanned multiple decades and used it as somewhat of a chopping block pointing out both inconsistencies, enigmas and outright head scratcher anecdotes from his career. I will never forget reading Greenspan and Kennedy’s paper, Estimates of Home Mortgage Originations, Repayments, and Debt On One-to-Four-Family Residences (written a good deal before the crash) where the authors discuss regular mortgage debt outstanding (RMDO) from the Federal Reserve Board’s flow of funds accounts where couple of things really stand out, of course, now through the filter of hindsight. Specifically, how “extractions” of home equity were to be paid back. The methods outlined were, “those resulting from refinancings, cancellation of debt by home sellers (separated into foreclosure sales and all other sales), unscheduled mortgage repayments, and scheduled amortization.” The first two mentioned should have been a warning of alarmist portions, namely, the idea that extractions were simply going to be paid back by papering over them with more debt, and certainly this happen for a while. But also, the assumption that there was always going to be someone who came along behind you and got into more debt than you did. The data from this paper spans through 2004, two years after the following activity pointed out by Ritholtz in, Celebrating Greenspan’s Legacy of Failure:

Amid the 2001 recession, and immediately following the Sept. 11 attacks, the FOMC brought rates down to new lows. Rates were under two percent for three years, and at one percent for a full year. This was simply unprecedented, and the impact was severe. Everything priced in dollars ramped higher. Inflation expanded rapidly, Gold began a decade-long bull market, and oil increased from about $20 to almost $150. The housing market took off, and rose faster and higher than ever before, setting up the inevitable denouement.

The result was clearly illustrated in the tables of Greenspan’s working paper from 2005, asset inflation:

Home Values 1991-2004

But this was not seen as a cause for alarm, as reflected in the Chairman’s words from a year earlier,

In evaluating household debt burdens, one must remember that debt-to-income ratios have been rising for at least a half century. With household assets rising as well, the ratio of net worth to income is currently somewhat higher than its long-run average. So long as financial intermediation continues to expand, both household debt and assets are likely to rise faster than income. Without an examination of what is happening to both assets and liabilities, it is difficult to ascertain the true burden of debt service. Overall, the household sector seems to be in good shape, and much of the apparent increase in the household sector’s debt ratios over the past decade reflects factors that do not suggest increasing household financial stress. And, in fact, during the past two years, debt service ratios have been stable.

As pointed out by Ritholtz, in the end, “Greenspan ultimately conceded there was a “flaw” in his market ideology. Easy Al, as traders had taken to calling him, recognized that allowing radical deregulation of credit markets was a mistake, as was opposing rules on derivatives and ignoring the subprime and non-bank lenders at the heart of the financial crisis.” In light of this, it’s no wonder at all that there is continued discussion of the complexities caused by headwinds five years after the official end of economic recession.

How Optimism Bias Changes Long-Term Projections

Weekend reading: IMF Working Paper, Growth: Now and Forever? by Giang Ho and Paolo Mauro. Those who do not follow the global market in general and the BRICs in particular (or other emerging economies), may not see a correlation to the U.S. market. In reviewing the paper, I would focus more on the psychological behavior of investors and the capital markets, rather than the particulars of emerging markets, their fundamentals, or the drivers in these markets, many of which are quite different from any of the G7. The premise is clearly stated in the abstract,

Forecasters often predict continued rapid economic growth into the medium and long term for countries that have recently experienced strong growth. Using long-term forecasts of economic growth from the IMF/World Bank staff Debt Sustainability Analyses for a panel of countries, we show that the baseline forecasts are more optimistic than warranted by past international growth experience. Further, by comparing the IMF’s World Economic Outlook forecasts with actual growth outcomes, we show that optimism bias is greater the longer the forecast horizon.

Just what do the authors mean by optimism bias? It’s frankly, little more than wish fulfillment. In the authors’ opinions, it is adding more weight to recent occurrences, then extrapolating those positive outcomes across the spectrum of events, where “forecasters often predict continued rapid economic growth into the medium and long term for countries that have recently experienced strong growth.” Again, this does not have a direct correlation to recent events in the U.S., as this economy has experienced forward yet modest growth in the last five years. But could this say anything about the continued expansion in the capital markets, which have little relation to economic events as they tend to affect the average person, employment and a service driven economy? In other words, although the markets seem to be pushing forward at dizzying heights, most would say there is nothing to indicate any kind of an eminent correction. Is the same bias at work in our capital markets? You decide. But the paper makes for an interesting case for why, in spite of argumentation for why global growth may in fact be slow in the coming years, forecasters continue to project strong growth, where predicting “economic growth into the medium term and beyond is notoriously difficult.” It would seem there are lessons to be learned here about bias from any perspective and how this bias has a tendency to affect the view of the future.

Center of the U.S. Population 1790-2010

The U.S. Census Bureau has some of the most interesting data visualizations, many of which help illustrate the magnitude of the data being presented. According to the Bureau, after each decennial census is tabulated, “the Census Bureau calculates the center of population. The National Mean Center of Population based on the 2010 Census is near Plato, Mo., an incorporated village in Texas County.” The mean center is fictitious of course, for the purpose of illustration as the Bureau goes on to explain, “the center is determined as the place where an imaginary, flat, weightless and rigid map of the United States would balance perfectly if all residents were of identical weight.” And the movement is in a southwesterly direction as the interactive map below illustrates: 

What is even more interesting are the suggestions for why the migration has moved in this direction. The Bureau states that the westerly direction has historically been the result of a “sweep [that] reflects the settling of the frontier, waves of immigration and the migration west and south.” But it is fair to say that although the imaginary mean center still resides in the South, a very large and disproportionate part of the population (as well as commerce) has settled in the West in general and California in particular. And there is a clear movement (though not a net loss) from California and the Southwest. The economic and sociological reasons for this would be very interesting to explore.