U.S. Capital Flows, Unemployment, and Fed Policy

July 16, 2009

U.S. capital flows with foreigners were surprisingly weak in May, according to the latest monthly Treasury Department figures.  Net transactions involving long-term securities generated an outflow of $19.8 billion, puzzling analysts who had anticipated an inflow of roughly the same amountAs a result, the first five months of 2009 saw a net inflow of only $7.1 billion per month, down from full-year inflows of $42.9 billion per month in 2008, $64.7 billion per month in 2007 and $74.4 billion per month in 2006.  Two broader aggregates of net capital flows, the first still restricted to long-term assets but excluding swaps and other involving certain other modifications and the other encompassing many short-term security flows, recorded even larger net outflows in May as well as net year-to-date deficits as well.  These data indicate that dollar support from capital flows has deteriorated by more than the improvement in the U.S. goods and services trade deficit, which averaged $29.2 billion per month in January-May after $58.0 billion per month in 2008.

Newly reported claims for unemployment insurance continued to drop sharply in the week to July 11th and averaged less than 600K during the latest four weeks, the first time since the four weeks to January 31st that such has happened.  The latest four-week mean was 584.5K, down form a peak of 658.75K per week in the four weeks to April 4th.  Continuing jobless insurance claims of 6.273 million in the week of July 4 were 642K less than the record prior week’s total of 6.915 million but still 1.785 million above the end-2008 level, a net jump of 40%.  An historical rule of thumb, which has held through most business cycles, is that new jobless claim totals running above 400K tend to be associated with periods of recession.  A second rule of thumb says that although many labor market statistics lag the business cycle, new jobless claims are a leading economic indicator and generally turn downward close to a recession’s end.  Both of these rules are unlikely to be correct this time because new claims peaked substantially higher than 400K.  Claims have plunged some 152K from peak but remain 122K above 400K.

Did somebody say growth recession?  Like the misery index (inflation plus unemployment rate), “growth recession” is a piece of pop-economist jargon connoting positive GDP growth that is so low that unemployment continues to crest.  Minutes from the late-June FOMC meeting depict a growth recession in the aftermath of the Great Recession, although the text doesn’t explicitly use the expression.  Officials revised projected unemployment higher, although not to the 10.8%+ peak that I’ve been predicting, but were more hopeful about 2010 growth.  Coverage of the minutes in the business printed press rightfully stressed the continuing downside growth risks with headlines of “Fed vows no let-up in unemployment” (Financial Times), “At Fed meeting, fears that stimulus is not reviving the economy” (New York Times), and “Fed girds for rising unemployment, growth” (Wall Street Journal).  The big revelation in the minutes was disagreement over effects of $1.75 trillion of asset purchases on long-term interest rates and future inflation.  In collective behavior, disagreement often translates into an indecisive stalemate.  So while the minutes paint a continuing weak economy that would be vulnerable to any new shocks, the group took no action to modify its asset purchase plan.  And while plenty of time appears to have been devoted to thinking about exit strategies, nothing concrete along those lines was tipped to the market other than reassurance that the Committee is confident that the task can be done safely when the right time comes in a way that does not jeopardize the central bank’s broad mandates.  Some analysts reading between the lines are inferring that the Fed is likely to raise interest rates and reduce quantitative easing simultaneously rather than in the sequential manner followed by the Bank of Japan in 2006-7.

Copyright Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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