NEW$ & VIEW$ (6 FEBRUARY 2013)

Housing hirings. Sequester. Poland economy slows. Australia retail sales fall. China’s challenges. Italian elections.

Open-mouthed smile  Home Depot to hire 10,000 more seasonal workers in spring

Home Depot Inc said it will hire 10,000 additional seasonal workers for its key spring selling season as it sees higher sales growth during the period.

The home-improvement retailer said it will hire 80,000 seasonal workers this year, 14 percent more than it hired last year.

Smile  Chief Executives’ Confidence in U.S. Economy Improves in Survey

The Young Presidents’ Organization index of sentiment climbed to 61.0 from 59.1 in the previous three months. The gauge eased in the previous two quarterly surveys, before U.S. lawmakers in January reached a compromise to avert tax increases for most workers that would have kicked in automatically at the start of the year. (…)

Thirty-nine percent of respondents said the economy has improved from six months earlier, up from 33 percent who said so in the previous survey. Sixteen percent thought conditions had deteriorated, compared with 25 percent in the previous quarter. (…)

Forty-two percent said the economy will improve in the next six months, up from 36 percent in October’s survey. Executives’ outlooks for sales and hiring also showed gains. (…)

The YPO’s global confidence index increased 2.3 points to 61.3. While sentiment among executives in the European Union remains lowest among all regions, the measure climbed 4 points to 55.4.

Obama Seeks Delay in Automatic Cuts  The president called on Congress to pass a small package of spending cuts and tax overhauls to delay automatic spending cuts, saying thousands of jobs and the economy hang in the balance.

Obama may not succeed to kick the can further out. Ezra Klein in the Washington Post Wonkblog explains why the sequester will be tough on the economy:

“On Friday,” writes Alec Phillips, an economist at Goldman Sachs, “we lowered our outlook for federal spending, to take into account the increased likelihood that cuts under sequestration take effect.”

With that built into their baseline, the cuts to federal consumption and investment look deep in the coming years. Here’s their graph, which adds a bit of historical perspective:

Goldman Sachs

“Sequestration, spending caps, and reduced war spending will together reduce real federal consumption and gross investment by 11% over the next two years,” writes Phillips. Ouch. That’s a very big drop in a very weak economy. (…)

Pointing up Even if there’s precedent for this kind of a drop, there are at least three reasons to be particularly concerned about it happening now. First, the previous periods of austerity that Phillips mentions were primarily driven by the end of major wars. That meant that a lot of that spending was not directly raising living standards in the United States, and so its absence didn’t have the kinds of consequences of, say, the sequester. Second, this graph misses the significant tax-side austerity we’re engaged in, with the expiration of the payroll tax cut and the high-income tax increases from the fiscal cliff deal serving as an additional drag on growth. And third, the economy remains unusually weak by historical standards, and this kind of fiscal drag is going to make it that much harder to recover.

Pointing up Something to remember about the sequester is that part of the reason it was never supposed to happen is that it’s not backloaded. That is to say, where most deficit-reduction proposals have been structured to deliver their heavier cuts in years five-10, when the economy is further along in its recovery, the sequester’s cuts in year one are of the same magnitude as the cuts in year 10. That is to say, from the perspective of the recovery, it’s a particularly nasty and dumb approach to cutting spending.

Storm cloud  Poland Cuts Main Rate for Fourth Month as Economy Slows  Poland’s central bank cut its main interest rate for a fourth month to avert the biggest economic slowdown in more than a decade after consumer spending plunged amid Europe’s debt crisis.

Policy makers have reduced borrowing costs by 1 percentage point since November as growth in the European Union’s biggest eastern economy slowed to 2 percent last year, less than half the pace in 2011. Individual consumption, which makes up 62 percent of gross domestic product, added 0.5 percent to GDP in 2012, the least since comparable data were introduced almost two decades ago. (…)

In December, retail sales dropped the most since 2005 and the jobless rate rose to 13.4 percent, the highest in almost a year, after exports increased 4.1 percent in the 11 months through November compared with 13.3 percent a year earlier. Exports to the crisis-hit euro area were 52 percent of total foreign sales compared with 54.3 percent a year earlier.

Storm cloud  Australian Retail Sales Fall in Longest Decline for 13 Years

Sales slipped 0.2 percent to A$21.4 billion ($22.2 billion) from a month earlier, when they declined a revised 0.2 percent, the Bureau of Statistics said in Sydney today. (…)

Retail sales, adjusted to remove inflation, rose 0.1 percent in the three months through December from the previous quarter.

Punch  China’s challenges, explained in three easy charts

The first one probably needs no introduction:

China - changing age composition - Nomura ICMR

You’ll have heard a lot about this lately — partly because that 2015 turning point is looking a bit optimistic, since an official report said the working-age population actually shrank in 2012.

Now, we’re not sure this is quite the disaster everyone’s making it out to be. China, for example, has a relatively inefficient labour force and its industries are not terribly automated compared to say, western countries. There’s scope for doing more, with the right kind of investment.

However, that’s all for the future. This next chart shows how China has grown in the past decade or two:

China - components of growth 1995 to 2011 - Nomura Foundation

Note that a portion (0.7 percentage points) comes from labour input growth (ie, more work, which is in large part a function of a growing workforce). Growth in labour input also forms part of the total factor productivity growth (which itself was 3.7 percentage points). So, we can see straight off that China could lose a chunk of potential growth as the labour force begins to shrink.

Secondly, the big contribution of capital input to growth needs to fall as the economy rebalances. And, as the next chart shows, it will also have to become much more effective if anything like current growth rates can be maintained.

To chart three…

The right-hand column (ICOR – incremental capital output ratio) shows how extremely unproductive China’s capital is compared to Japan, South Korea and Taiwan during their transformational expansions. And that Chinese capital productivity has actually worsened in recent years:

China - capital output ratio compared to Japan, SKorea, Taiwan - Nomura ICMR

The charts are all from a presentation by C. H. Kwan, a senior fellow at Nomura’s Institute of Capital Markets Research.

They display, with great clarity, some of the unavoidable realities of China’s economy which we’d summarise thus:

1. China’s growth to date has been based on cheap plentiful labour and massive levels of capital investment.

2. Both of these are set to decline. Working age population has peaked and China’s capital efficiency is poor. (No surprise here. Where, for example, does all that steel actually go?)

3. If its capital efficiency rose to match, say, Japan’s, China’s growth prospects could theoretically be maintained or at least remain high.

4. However certain powerful structures — particularly the SOEs, but a lot of other policies in dire need of reform — are standing in the way of dramatically improving capital efficiency.

5. So far there is little sign that the new leadership is willing to take the difficult steps to remove those barriers to increased efficiency. For example, it would mean privatising the large and cossetted state-owned enterprises. However, the SOEs are by their nature big and well-connected.


Confused smile  Berlusconi Closes Bersani’s Lead Within Error Margin, Poll Shows

Berlusconi has been gaining on Bersani as he steps up his promises to cuts taxes and end a reviled levy on first homes implemented by the government of Prime Minister Mario Monti that he sustained in power. Monti has accused Berlusconi of trying to buy the election.

Support for Berlusconi’s coalition, including his People of Liberty Party and the Northern League, rose 0.1 percentage points to 29.4 percent, while backing of Bersani’s center-left coalition fell 0.2 percentage points to 33.1 percent, Tecne also said.

A separate poll by Ipsos for RAI3’s “Ballaro” television program released late yesterday said the gap between the two blocs narrowed to 8.7 percentage points from last week when it was 10.8 points.


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