Details, Details

All we are hearing seeing at the moment are snippets of news rather than headline grabbing insights into the big numbers we all care about. But there are sometimes tell tale signs of what’s in store for us in those details, so here’s a few of them:

Import prices: the price of imports into the US jumped 1.1% in December. That’s quite a movement for one month. The biggest increase came in fuel costs where prices were up 4.1%. Non fuel imports saw an increase of only 0.3%. This continues a trend that could have more wide reaching impact as the newt year or two unfolds. Commodity prices are rising more rapidly than finished goods prices. This is the result of worldwide demand and the continued emergence of countries like China whose economy is sucking in commodities at a prodigious rate. There is nothing nefarious or odd about this. It is the natural progression of development. The simple fact is that the Chinese economy will soon be far larger than that of the US and so we all had better get used to the notion that activity in China, not activity in the US, will set global trends. This, I suspect goes for global standards too: how long will it be before the Chinese market is the one where new products are unveiled? This implies that Chinese standards will intrude into the marketing plans of everyone worldwide. It also implies an ever growing Chinese presence in investment, banking, and economic policy setting. Get used to it.

Meanwhile rising commodity prices ought to be a warning to all industrialized nations that they had better take conservation, waste management, and recycling seriously. It is a long term trend not a short term cycle. More to the point we all need to pay attention to the efficiency of aggregate economies: how much resource does it take to generate a dollar [euro etc] of wealth? Last I looked the US lagged way behind the Europeans in this regard due to its cheap energy heritage. US industry and homes are extremely wasteful and it takes a far greater amount on input to create a similar output. I haven’t looked at the detailed numbers for a while now, but my hunch is that the efficiency advantage still lies with Europe – especially Germany.

Municipal Bonds: We don’t hear much about local fiscal crises, but they are one of the great threats to the overall US economy. The well known basket cases like California are simply the tip of a very large iceberg. Just yesterday legislators in the state of Illinois were forced to vote for a 66% tax increase in order to rescue their state’s decrepit finances. We are all accustomed to looking at bond spreads in order to detect what the markets think about local finances. The media is full of Greek, Irish, or Portuguese bond prices versus those of Germany or other more secure nations. We can do the same thing here in the US for state issued debt. When we do, we find that Illinois tops the risky list with spreads of about 215 basis points over a AAA bond. California weighs in at 125 basis points, while rust belt stricken Michigan is at 80 basis points. For reference New York City is at 56, and Florida at 40. While I do not expect a rash of defaults on local debt, there is no doubt that the same process of separating good economies from bad economies is going on within the US municipal debt market. It will become harder for some states to issue debt, and the interest cost will start to impinge on local tax rates and opportunities. The last two or three decades has seen reckless budgeting at various local levels here, and there are serious doubts about whether all states and cities can survive without draconian cuts in services. Here in New York the incoming governor is trying to cap property taxes which is a sure sign of future service quality declines. The reason California is in such a mess is that it voted for a similar cap, subsequent to which it was forced to defund all sorts of services, not least its once vaunted public education system which now languishes in disrepair.

I have reported here before, but it bears repeating, that the impact of local government efforts to balance their budgets will be to slow economic growth. Whether this braking effect is sufficient to pull the US as a whole down I doubt. But it will dampen activity, possibly seriously, over the next year or two. This is one reason why I advocated a larger Federal stimulus – but that’s a lost cause!

Portugal, and the Baltics: We read everywhere of the peripheral European countries and their issues. Today the bond market is breathing a little more easily because the Portuguese managed to float a bond issue and thus avoid immediate cash flow problems. But take a look at the price of those bonds. The poor taxpayers of Portugal will be paying through the nose for that debt. For what purpose? So that their creditors don’t take a hit on the old debt. This story is getting repeated time and again. In fact it is getting dull. The banks, via their ridiculous activities threw the world into recession. They were bailed out. That cost an arm and a leg, and sent some smaller countries into recessions so deep that the constitute depression status. And now those countries are being forced to issue debt to cover the cost of the recessions caused by the banks, while earnest bankers opine on the imminence and terrors of possible sovereign defaults. Apparently we must go through hell in order that the banks continue to issue credit so we can pay for the bailouts for the … banks. Am I the only person who finds this circularity both demeaning and insulting?

And please, no more headlines about how well Latvia is doing. Yes its economy is now growing. And, no, it is not a poster child for the benefits of austerity. It’s GDP dropped like a stone. It’s unemployment shot through the roof. It is an unequivocal disaster – witness the mass out migration of its population. Latvia is a poster child for why we do not think austerity is the answer. Not that you could figure that out from the glowing headlines in the Wall Street Journal and Financial Times. It is a success only if you don;’t worry about the people who live there. Which I do.

Corporate Taxes: It didn’t take long before the Obama administration jumped back onto my black list. Today we are hearing rumors that it wants to reduce corporate tax rates. This in an era of all time profit making. I suppose someone in Washington has bought into the old supply side argument and wants to ‘stimulate’ the economy by making business cheaper to do. No doubt we will be told that lower corporate costs will generate jobs. I hear that there is some give and take on the issue and that the lower tax rates may come along with a reduction in the loopholes and give-aways that debilitate the current set up. The US has one of the highest corporate tax rates in the world, but that ignores all those loopholes. The actual rate paid is much smaller. While I understand that corporate tax rates are simply passed along to consumers as higher prices, I find it politically inept to be talking about cutting government revenues – potentially – in the face of a rampant and anti-government Republican House of Representatives. Ny guess is that we are headed for another one of those pyrrhic victories Obama loves to win. So look for a fine bi-partisan hand out to business followed by a zero boost to jobs.

The simple fact is that business is flush with cash. If it wanted to employ it would. It doesn’t need more hand outs. Putting tax cuts on the agenda, even if loopholes are also discussed, is a dangerous ploy. The tax rate will be cut and the Republicans will block the closing of loopholes. The deficit will rise, and unemployment will fester. I think we’ve seen this act before.

And I am not re-assured to learn that Tim Geithner is going to discuss this all over dinner with “leading business leaders”. When was the last time he had dinner with “regular people”? My guess? Never.

The Beige Book: This is the dossier put together by the Fed as it gathers local and anecdotal information from around the country. It forms a vital part of the background for policy makers because it fills local detail into the overall context. The latest version was made public today, and was fairly encouraging. This is especially true for employment where local reports suggest that businesses are, at last, hiring not just to replace workers previously fired, but to expand as well. In other words the long drought may be over. Bear in mind this “data” is often more opinion than fact. Still, experience shows that it usually contains germs of truth. If that holds, then the jobs market will improve this year. Whether that improvement is enough to bring unemployment down quickly I doubt. Look at it as a first step. In the meantime the Fed reports that real estate and tight credit are still the biggest drags on growth. There’s nothing new there.

So, as you can see there are number of details we can find useful as we try to understand where we are headed. One or two, like the municipal debt problem, and the Beige book data are worth following. They could turn out to be very important indicators down the road.