Economist Online

On Thursday, the 4-week moving average of weekly jobless claims reached the lowest level since April 2008. The US labor market continues to show sign of thawing.

If this trend continues, consumer confidence is likely to bounce back. Then the US will be on the track of a virtuous cycle: business investment will follow, so will bank lending.  We need to wait for more data in coming weeks to confirm such trend.

Jagdish Bhagwati analyzes the recent move by the US to establish Trans-Pacific Partnership (TPP).

As if undermining the World Trade Organization’s Doha Round of global free-trade talks was not bad enough (the last ministerial meeting in Geneva produced barely a squeak), the United States has compounded its folly by actively promoting the Trans-Pacific Partnership (TPP). President Barack Obama announced this with nine Asian countries during his recent trip to the region.

The TPP is being sold in the US to a compliant media and unsuspecting public as evidence of American leadership on trade. But the opposite is true, and it is important that those who care about the global trading system know what is happening.

Link to the full text.

Greg Mankiw explains:

I estimated the following simple formula for setting the federal funds rate:

Federal funds rate = 8.5 + 1.4 (Core inflation – Unemployment).

The parameters in this formula were chosen to offer the best fit for data from the 1990s.

Eddy Elfenbein has recently replotted this equation.  Here it is:

The interest rate recommended by the equation is the blue line, and the actual rate from the Fed is the red line.

Not surprisingly, the rule recommended a deeply negative federal funds rate during the recent severe recession.  Of course, that is impossible, which is why the Fed took various extraordinary steps to get the economy going.  But note that the rule is now moving back toward zero.  As Eddy points out, “At the current inflation rate, the unemployment rate needs to drop to 8.3% from the current 8.5% for the model to signal positive rates. We’re getting close.”

The only caveat is the estimation was done in 1990s.  It captured the Fed’s interest rate policy in 1990s, but may not be accurate for the current Fed, especially when the Fed chooses to deviate from the Taylor rule.

The most recent reading was 8.08 Chinese Yuan per Euro, the lowest reading since October 24, 2002. Chinese government seems to have allowed a large appreciation of Yuan against the Euro in recent months. They may have done so by deliberately selling euro-denominated assets.

A fantastic chart from NYT on the US stock market cycles in the long run.

Remember:  TWO does not prove anything statistically.

In a presentation to this year’s annual meeting of the American Economic Association, Alan Blinder argues that the circumstances—low inflation and low nominal interest rates, persistent excess capacity, and fiscal policy paralyzed by large debts—that have forced central banks to operate through unconventional policy will be a recurring feature of the economic landscape. “We can’t stuff the crazy aunt back in the closet”.

According to Economist Magazine, of the rich world’s four major central banks, Britain’s and Japan’s already have their policy rates stuck near zero and the fourth, the European Central Bank (ECB), is likely to get there this year. Meanwhile, the balance-sheets of all four institutions have ballooned as they expand the volume and range of assets and loans they hold (see charts below).

Whatever central bankers do, they cannot repair problems best fixed by politicians, such as America’s incoherent fiscal policy or Europe’s fractured institutions. Asked about the ECB’s aggressive new lending to banks, Masaaki Shirakawa, the governor of the Bank of Japan, said it could “buy time”. But he warned it could backfire if politicians fritter away whatever time the central bank has bought. Unfortunately, that risk is never low.

John Taylor at Stanford offers some really good insights.

Bob Doll at Blackrock offers his market predictions in 2012-

10 Predictions for 2012

Making predictions for a new year is always a difficult task, but this year the uncertainty associated with emerging markets growth, upcoming elections, and the European debt situation in particular, make the forecasting exercise especially precarious. Nevertheless, it is with this backdrop that we move forward with our predictions for 2012:

1. The European debt crisis begins to ease, even as Europe experiences a recession
2. The US economy continues to muddle through yet again
3. Despite slowing growth, China and India contribute more than half of the world’s economic growth
4. US earnings grow modestly, but fail to exceed estimates for the first time since the Great Recession
5. Treasury rates rise and quality spreads fall
6. US equities experience a double-digit percentage return as multiples rise modestly for the first time since the Great Recession
7. US stocks outperform non-US stocks for the third year in a row
8. Dividends and buybacks hit a record high
9. Healthcare and energy outperform utilities and financials
10. Republicans capture the Senate, retain the House, and defeat President Obama

In the last summer, David Rosenberg made the recession call – he’s 99% sure the US will slip into recession. Despite a very volatile second half of 2011, the recent data on unemployment, consumer confidence and housing sales all seemed to indicate the US economy is getting better.

But according to the leading economic indicator, shown below, the US economy is still pretty much under recession-watch territory.  Since late 1960s, the indicator only missed once in predicting the onset of recession — the second half of 2010.  In other words, at the current level of the index, there is a very high risk that the economy is likely to head down, not up. So will the indicator miss the target again, or we are indeed heading into another recession in 2012?

In the following video interview, the author of ECRI leading indicator explains to Bloomberg’s Tom Keen why he thinks the US is still not out of woods yet.

The latest housing price,  as captured by the Case-Shiller Index, continued to fall in October. Here are two sharp charts from Calculated Risk.

Time trend:

Accumulated price fall by major US cities:

Combined with latest sales figure, the inventory of existing home sale, after a faked jump due to government’s incentive program, seemed starting to move again.  However, the new home sale is still very much depressed.

According to PNC’s Stuart Hoffman, 2012 will be a transition year for the housing market.  The hope is that the gradual fall of the housing price may eventually clear the inventory,  six years after the last housing peak.

If the economy turns weaker in 2012, the Fed may eventually be forced to buy more mortgage-backed securities. However, the likelihood of any household debt relief program is dim, considering the current fiscal situation. In 2012, we are likely to see a continued muted growth in the US. Now people began to appreciate the importance of housing in driving business cycles. Without robust recovery in US housing market, any talk of V-shaped recovery only sounds foolish.

Part 1:

Part 2:

Part 3:

The recent initial claims on unemployment benefits shows a major improvement in the US labor market: