Regional Economic Activity in the USA

I have made several postings to this blog (here and here) about my recent move from the depressed Michigan economy to the vibrant Texas economy. This move really was an eye-opener for me on the amount of variation in regional economic activity. Below is a graph of the year-on-year growth rate of real economic activity (measured by the Philadelphia Fed's state coincident indicator series) in Michigan, Texas, and the USA. Notice how Texas over the past few years has been doing better than the USA while Michigan has been doing worse.

Gene Epstein picks up on this theme in his interesting article on regional economic differences in Barrons. I have excerpted the first part of his piece below:

Fifty States, Fifty Job Rates
By GENE EPSTEIN

"IF A RECESSION IS WHEN YOUR NEIGHBOR loses his job, and a depression is when you do, then our neighbors in Michigan have been suffering a recession for some time. But if, to put a new spin on the time-worn quip, an expansion is when your neighbor gets a better job, and a boom is when you do, then if you live in Texas, you're probably enjoying a boom.

That a boom and a bust could be happening at the same time, in the same country, only highlights an underappreciated fact: While the U.S. economy is a useful abstraction, it consists of many different economies, each with its own special story. State and regional data are not as timely as national data. But the recently issued Bureau of Labor Statistics release for September 2007 on regional, state, and certain local labor markets provides a reasonably timely update.

Nationally, the U.S. unemployment rate stood at 4.7% in September '07 (the October reading is due out this Friday), up marginally from 4.6% in September '06. While that technically qualifies as a growth recession -- economic growth accompanied by a rise in joblessness -- it's at rates of joblessness that are still historically low.

Now, unravel what that 4.7% is derived from, and we find widely different stories state by state, although not quite as widely different as in previous periods in history. Michigan, to begin with, is surely suffering a full-blown recession. The Great Lakes state's unemployment rate hit a 14-year high of 7.5% in September, up from 7.1% in September '06, giving it the dubious honor of having the highest jobless rate by far of any of the 50 states. (The runner-up: Mississippi, with a jobless rate of 6.4%.)

The unemployment rate in the Detroit area is one of the highest in Michigan, at 7.9% in September, up from 7.3% 12 months ago. And that, of course, is another way of saying that the main cause of Michigan's bust is the hemorrhaging auto industry, with woes in real estate only a supporting player. While the national economy has had substantial gains in jobs of around 6% since the last peak in the business cycle in early-2001, Michigan's employment tally is down around 6% from that peak.

Texas, by contrast, seems to be enjoying a boom. The second-most-populous state in the union has seen its unemployment rate fall from 4.8% in September '06 to 4.3% in September '07, close to a seven-year low. And at 10%-plus since early 2001, job growth has been much higher than the national rate."

(Read the Rest)

Asset Bubbles... and Monetary Policy

There was an interesting article this past week from Daniel Gros who reminded us that the boom-bust cycle in the U.S. housing market is not unique. Rather, there are also "House Price Bubbles Made in Europe." Here is a figure from his paper that compares real housing prices in the Euro area and the U.S. through 2006:

It is interesting how real housing prices in the Euro area follow a similar pattern to the U.S. real housing, albeit with a lag. As JMK has noted in the comment sections of this blog, this common movement in real housing prices means my often-expressed past monetary profligacy view (here, here, here, and here) cannot be the whole story. Financial innovation, low financial literacy, predatory lending, and excess saving from other parts of the world are meaningful contributors too. Nonetheless, the macroeconomist in me has a hard time believing these factors as being completely independent of--or as consequential as--loose monetary policy in advanced economies coupled with boom psychology.

To illustrate my point here is a figure (click here for a larger file) from one of my working papers:

The first graph in the figure plots the year-on-year growth rate of quarterly world real GDP against a weighted average G-5 short-term real interest rate. The quarterly world real GDP series is constructed by taking the quarterly real GDP series for the OECD area and using it with the Denton method to interpolate the IMF’s annual real world GDP series. This figure reveals that just as the global economy began to experience the rapid growth in the early 2000s, the G-5 short-term real interest rate turned negative as monetary authorities in these countries eased monetary policy. This positive G-5 interest rate gap—the difference between the world real GDP growth rate and the G-5 short term real interest—narrowed as the short-term real interest picked up in 2005, but it still fell notably short of the world real GDP growth rate by the end of 2006. Two measures of global liquidity corroborate the easing seen by the positive G-5 interest rate gap. The first measure is a ratio comprised of the widely used ‘total global liquidity’ metric, which is the sum of the U.S. monetary base and total international foreign reserves, to world real GDP. The second measure is a ratio comprised of a G-5 narrow money measure, which is the sum of the G-5’s M1 money supply measures, to world real GDP. Both measures show above trend growth beginning in the early 2000s. The bottom panel of Figure 5 shows some of the consequences of this global liquidity glut: real housing prices soar in the United States and United Kingdom and are systematically related to the positive G-5 interest gap. (I would love to get Daniel Gros' real housing price index for the Euro area and run a scatterplot of it too)

So in the end I am stuck on the view that loose monetary policy (in conjunction with boom psychology) was very important to the housing boom-bust cycle of the past few years.

Not a Pretty Sight

Menzie Chinn over at Econbrowser is feeling distressed today. He came across the below graph in the IMF's Global Financial Stability Report that shows the dollar amount of mortgage resets coming due in the future, as well as those in 2007. Take a look at the resets coming due in 2008--they are mostly subprime mortgages. Menzie looks at this sobering graph and concludes the "subprime resets in 2008 should put to rest the notion that the housing market's troubles are soon to be put behind."

C. Fred Bergsten on the Euro

Here is C. Fred Bergsten of the Peterson Institute on the fate of the Euro. His punchline is very similar to Thomas Palley (Triangular Trouble: the Euro, the Dollar and the Renminbi),

Europe Must Look East to Deal with the Euro

C. Fred Bergstein

Op-ed in the Financial TimesOctober 11, 2007

The euro has recently hit a succession of record highs against the dollar. A number of European leaders, including Nicolas Sarkozy, the French president, and Jean-Claude Juncker, chairman of the group of 13 eurozone ministers, have called on the United States to take action to halt the trend. The issue will be high on the agenda of the forthcoming Group of Seven leading industrialized nations and International Monetary Fund meetings in Washington. The eurozone should look to Beijing rather than Washington, however, if it wants to avoid the costs to its economies of a much stronger currency.

The bad news for Europe is that the dollar is likely to decline by at least another 15–20 percent on average. Growth differentials have now moved against the United States, which may experience the slowest expansion of any G-7 country in 2007. Differentials in short-term interest rates have correspondingly moved against the dollar. The US current account deficit is still running close to 6 percent of gross domestic product and, along with America’s own capital outflow, requires financing through an unsustainable $7 billion of foreign capital inflow every working day. The sharp pickup in US productivity growth that underpinned the strong dollar for a decade has been fading. The euro creates a meaningful international competitor for the dollar for the first time in a century and will attract continuing portfolio diversification from around the globe, including the super-rich sovereign wealth funds.

The good news for Europe is that most of the remaining decline of the dollar should take place against the currencies of the East Asians and the oil exporters. They are running the counterpart surpluses to the US deficits. They have piled up massive foreign exchange holdings that already far exceed any plausible needs. They are enjoying rapid economic growth that could most easily accommodate the reductions in external surpluses.Many of them need to shift their growth patterns to domestic expansion for internal reasons. A few of the surplus countries have moved in this direction. The currencies of South Korea, Indonesia, and Thailand have risen more against the dollar than has the euro. Kuwait has abandoned its dollar peg and let its rate float upward.

But the exchange rates of the largest surplus countries of Asia have barely budged. China is, of course, the most blatant case. Its global current account surplus is likely to exceed $400 billion in 2007, more than half of America’s global deficit. This will represent more than 12 percent of its GDP and provide one-third of its total economic growth. The renminbi needs to rise over the next several years by a trade-weighted average of more than 30 percent, and much more than that against the dollar, as part of a broader rebalancing of China’s growth strategy towards relying more on domestic consumption than on investment in heavy industry and climbing trade surpluses.

China claims to have adopted a market-oriented currency policy in July 2005. At that time, it was buying $20 billion to $25 billion monthly in the foreign exchange markets to block appreciation of the renminbi. It is now intervening at $40 billion to $50 billion per month. On that metric, its exchange rate is about half as market-oriented as two years ago. It is thus no surprise that the renminbi’s rise of about 10 percent against the dollar over this period was more than offset by the dollar’s fall against other currencies, so that China’s average exchange rate is weaker today than it was then, or in the early part of this decade when China’s current account was near balance and the dollar was at its record peak. Nor is it a surprise that China’s external surplus continues to soar.

Many other Asian countries hold their currencies down, through sizeable intervention of their own, to avoid losing competitive position to China. This is especially true of Hong Kong, Malaysia, Singapore, and Taiwan. Most of the large oil exporters intervene heavily to maintain undervalued pegs to the dollar as well. Japan’s currency is also substantially undervalued, though due to its appropriately easy monetary policy rather than any official manipulation. A substantial rise of the renminbi would almost certainly pull at least the other Asian currencies, including the yen, up with it.

The problem for Europe is that the inevitable further decline of the dollar will continue to occur mainly against the euro unless the large Asian countries and oil exporters permit substantial increases in the value of their currencies. Hence eurozone leaders should be addressing their concerns to Beijing, and to some extent Tokyo and Riyadh, rather than Washington, especially with the US current account deficit now falling and the budget deficit for fiscal 2007 at a mere 1.2 percent of GDP. Even if the euro were to rise a bit more against the dollar, large appreciations from the Asian countries and oil exporters would limit or even negate any further increase in its trade-weighted average and thus in the eurozone’s global competitiveness.

Rather mysteriously, Europe has been largely absent from efforts to address global imbalances over the past three years, in spite of warnings that it had the biggest stake in a geographically diversified outcome. The obvious places to start are effective implementation of IMF rules against competitive currency undervaluation and “prolonged, large-scale one-way intervention,” and the World Trade Organization rules against “frustrating the intent (of the Articles) by exchange action” and export subsidies, as Ben Bernanke, Federal Reserve chairman, has labeled China’s currency practices. Perhaps a euro at $1.50 or $1.60 will focus European minds on these imperatives.

House prices and the stance of monetary policy

A new paper provides further evidence on a view (see here, here, and here) promoted by this blog: past monetary profligacy contributed to the U.S. housing boom-bust cycle. Marek Jarociński and Frank Smets of the European Central Bank in a conference paper titled House Prices and the Stance of Monetary Policy find the following:

In this paper, we have examined the role of housing investment and house prices in US business cycles since the second half of the 1980s using an identified Bayesian VAR... There is also evidence that monetary policy has significant effects on residential investment and house prices and that easy monetary policy designed to stave off perceived risks of deflation in 2002 to 2004 has contributed to the boom in the housing market in 2004 and 2005.

I wrote a similar note on U.S. monetary policy and the U.S. housing boom. In my note, though, I use a different measure of monetary policy than the paper above and discuss the issue from a more Wicksellian perspective. Nonetheless, the conclusions are essentially the same: the Fed was too accommodative during the "deflation scare" 2002-2003 and was slow to return to normalcy thereafter.

The Business Cycle and Religiosity

Does economic distress increase religiosity and vice versa? This is a question that first intrigued me back in 2001, during the last U.S. recession. I was visiting my sister in Atlanta, Georgia and attended her church. During a part of the church service a microphone was passed around to individuals who then shared with the rest of the congregation what was going on in their life. Almost everyone who participated during this open mike time had just lost their job and were asking God to find a new one for them. As the right side of my brain sympathized with these suffering individuals, the left side of the brain got excited and started thinking about the econometric possibilities. I wondered, might this experience be reflecting a much broader, systematic relationship between church attendance and the business cycle? If so, were would I get data to test for such a relationship? And would this relationship be different for different denominations? I was curious and wanted to find out more.

I was a graduate student back in 2001 and had other pressings issues that put this interesting question on hold. I recently started looking at this issue again and now have a working paper titled "Praying for a Recession: The Business Cycle and Church Growth." I will be presenting this paper at the annual meetings for the Association for the Study of Religions, Economics, and Culture (ASREC) in November. My abstract reads as follows:

Abstract: Some observers believe the business cycle influences religiosity. This possibility is empirically explored in this paper by examining the relationship between macroeconomic conditions and Protestant religiosity in the United States. The findings of this paper suggest there is a strong countercyclical component to religiosity for evangelical Protestants while for mainline Protestants there is both a weak countercyclical component and a strong procyclical component.

This paper is preliminary and I would appreciate any comments on it.

The Bubble Man Song

Via the Big Picture ,we have a great song from Scott Pettersen about the bubble man. Sit back, relax, and enjoy some great music.