Aggregate economic measures can’t be too closely followed, lest you lose sight of the forest for the trees. Never minding whether or not aggregate economic measures ever really offer any real and meaningful picture of actual economic conditions amongst the individuals and households of which their data is comprised, it still can be useful to give some of the metrics an occasional once over to try and ascertain in which general direction things might be headed. With that in mind, herewith are a few graphs I’ve borrowed from the excellent data base, “FRED”, kept over at the St. Louis Federal Reserve Bank’s website. I’ll begin with monetary velocity, which is a measure of how often a dollar changes hands. It is closely correlated, unlike short-term Fed Funds rates, with economic performance. The higher the velocity, the greater the economic activity (sort of intuitive) and vice versa. In some respects, it is a measure of that elusive idea of “animal spirits” that mysteriously appear when times are good, but slink away when times are bad and confidence is low.
Money velocity, after modest growth the last few quarters, has leveled off:
Consumer prices are not closely correlated to anything, as the following graph shows. Over the last 60 years or so, prices have steadily climbed, no matter the level of economic activity, except for a very brief and shallow decline in the middle of the last recession. The CPI has now finally reached its former high, and its rate of acceleration is increasing:
The Dollar vs. foreign currency
The Dollar has resumed the long-term decline it began in the early aughts. This explains much of the inflation in internationally-traded commodities lately seen. Unfortunately for those countries that attempt pegging their currencies to the dollar (i.e., China explicitly, and a whole host of others implicitly through using the dollar as their reserve currency), it means domestic inflation. It’s why the UN food index just touched another high.
Employment is barely growing, and is still about 10 million jobs less than it was the peak. This will be the subject of Obama’s speech tonight, if all the punditry is correct. But I seriously doubt that Obama will explain that the quickest and easiest way to create jobs is to lower the cost of labor, i.e., decrease the wage rate. For whatever reason, the instinct during relatively lean times is to do exactly the opposite. Real wages increased during the Great Depression, and as you’ll see momentarily, are increasing now.
Mortgage Interest Rates
Mortgage interest rates remain at historic lows, though have bounced up a bit from their latest bottom. This is of a piece with declining home prices. As I’ve mentioned before, it would not surprise me at all to see mortgage rates touch zero, at least in a real sense (interest rate minus inflation rate). Housing prices have to come down for the market to reach equilibrium. They’ll either do so through conventional price declines or through indirect means, like decreases in the rent paid for money used to purchase them. The new home market would be especially susceptible to zero-interest financing, just as new cars are today.
Housing prices bounced a bit off their recent lows according the FHFA (below), but Case-Shiller shows them still in decline. The overall picture is that they are either flat or declining, and there is no expectation for any change to the upside any time soon.
After a slight decline in the third quarter of 2010, productivity has resumed its long-term upward trajectory, but has lately flattened out. Productivity is the engine driving living standards. But it is also the engine driving unemployment. If the same work can be done with fewer people, then extra people are superfluous, particularly if there is no market for the additional output, which is something of the trap in which employment is ensnared at the moment. People need jobs so that demand will grow, but demand must grow for people to get jobs.
After falling in the early part of the recession, wages are again increasing. This is far more damaging to employment prospects than are productivity increases. American wages are far and away more expensive than the wages of many of our main trading partners (China, Mexico, etc.). The grinding efficiencies compelling international trade compel a leveling of wage rates amongst trading partners. Either America’s wages must go down or China’s must go up, or there must be some combination of the two.
The fear that gripped so many economic actors in late 2008 and into 2009 has mostly abated as the uptick in money velocity of late indicates. In my view, much of the reason for the decrease in fear and apprehension is attributable to the resolution of power-sharing in Washington in the aftermath of the mid-term elections, with each main constituency now enjoying some measure of representation. I believe aggregate economic metrics will continue to improve through 2011 and into the first two quarters of 2012, and then most likely swoon in the latter half of 2012. But not because the Mayan calendar foretells the end of the world on Dec. 21, 2012. Rather, it will be caused by the unsettled nature of the political landscape–no matter how well Obama or the economy does in the next eighteen months, he’ll still face a nasty re-election fight. Politics and economics are now, especially since the bailouts of 2008, so closely intertwined until anything that is substantively politically unsettling reverberates immediately in economic performance, causing those “animal spirits” to flee to the safety of their hideouts.