September 2006 Archives

Probably one of the more frequent comments from the Chinese on the yuan is that they do not have a timetable for revaluation. Yet the gradual appreciation of the currency continues--too gradual for some tastes, but appreciation nonetheless.

What if they did have a timetable? Well it would be a little like the Fed telling us what short term interest rates will be in January. If it is credible, it would anchor expectations and force the rebalancing of millions of dollars in various portfolios. Having no timetable means that the uncertainty remains and keeps a lid on speculation.

It is that last part that is particularly important to the Chinese. What we see as currency manipulation is their attempt to discourage speculation. Hence, now that the yuan appears to be revaluing a little faster in recent days, it may be the beginning of a new phase of their transition to a more flexible currency. The next phase may get interesting, so says Bloomberg:

Sept. 28 (Bloomberg) -- The yuan's gain may slow, after the biggest monthly advance since a link to the dollar ended last year, on speculation China's central bank will engineer two-way moves in the currency, Royal Bank of Scotland Plc said.

China may have allowed the strengthening to undermine the case for U.S. tariffs on Chinese goods as two senators mull a vote on sanctions, said Hong Kong-based strategist Ben Simpfendorfer. Wider swings create greater potential losses for traders speculating on a higher yuan. A central bank spokesman declined to comment on whether it will buy or sell the currency.

``The central bank is hesitant to allow one-way movement'' in the yuan, Simpfendorfer said in an interview. ``The central bank wants to create more two-way risk to prevent speculation on appreciation building up. That's not what we're getting.''

Checking the archives, I first did a post on this aspect of the question back in March of 2005. It still seems relevant.

When I teach international macro, I spend a day on exchange rate forecasting and explain why it is better to be consistently on the right side of the forward rate with your forecast than it is to have a smaller absolute error on the wrong side of the forward rate. This is because the forecast relative to the forward rate determines whether you will go long or short on the dollar. Pick the wrong direction and you lose.

So I can intuitively follow what the the Bank of Scotland's analysts are thinking China might do. The may want to add some uncertainty even about the direction that the yuan might go in the short term (weeks) even though the long term trend (years) will certainly continue in the direction of appreciation. If they play it well, it could stem the tide of speculation be making it riskier to play off of short term forecasts of the spot rate.

Now that is a bit more manipulative than the current scheme.

While it certainly is possible that is what they are doing, I'm not convinced yet. I think it bears very close watching to see if they reverse course in a month. Certainly the current (i.e. last few days) of appreciation will not continue much longer, I wouldn't bet that they would necessarily reverse.

And that is exactly what they want, isn't it?

Now before you go thinking that this is the kind of manipulation that we need to retaliate against, think again. When (and I do mean when) the yuan is finally floating at something approximating a free market value, the volatility of the yuan will have to approach that of the dollar, euro, and yen. Betting on appreciation cannot remain a sure thing forever. So if you are on the path to reform but you don't want to be led around by the financial markets, doesn't it make sense to try not to be too predictable? They need to be able to pull a rabbit out of a hat every once in a while--hence the title of this post, "currency sleight of hand". Watch what they do as well as what they say, because the two may not always agree.

It's unfortunate that it has to be this way (assuming the Bloomberg article turns out to contain a good prediction) because it does smack of manipulation. However it is not all that dissimilar to the communication dilemma faced by our own Federal Reserve. If you lay a timetable in front of the markets it does tie your hands. But although there is some similarity in the dilemma, the implications are different. While a clear communication strategy might lead the Fed towards a policy rule (which some would regard as a good thing), strict adherence to a policy rule is probably not in the best interest of a developing country which must balance so many policy goals. As we have seen so often, the stakes are rather high for developing countries.

It is going to be extremely interesting to see how this plays out. I'll be watching it closely. It certainly does seem reasonable for China to start widening the band. American's need to be aware that this means more volatility and more of an appearance of manipulation. So when the complaints start coming, just remember you heard it here first. Looking at the long view, this could turn out to be a very positive step. And while the politicians may spin the recent trend in yuan appreciation as a result of our tough talk by certain senators, I think that would be arrogant and naïve. The discussions between Secretary Paulson and the Chinese leaders are likely to have been a lot more nuanced--getting to the nuts and bolts of how to pull off the biggest feat of prestidigitation in currency history. That is, getting to the question of how to proceed with a substantial revaluation of the yuan without letting anyone see how you're doing it. At least I hope that is the case.

Postscript: The Bloomberg article concludes:

The yuan's 12-month forwards rose to the highest since at least 1998, suggesting traders are raising their bets on the currency's appreciation. One-year contracts show traders are betting the yuan will strengthen to 7.6445 in a year, compared with 7.6545 yesterday. That would mean the currency would rise 3.2 percent in that period.

Put that in the file to be revisited later.

UPDATE: See also Felix Salmon's post at Economonitor. There are a couple of nice items on the RGE main page about China as well.

Stephen Karlson (Cold Spring Shops) discusses the college rankings, the arms race among universities, and the role of the "mid-majors". Here's a highlight of the long version:

The higher education premium is a premium to human capital formation, not an incentive to acquire a signal. "Nationally-competitive" is a statement about success in teaching, learning, and graduating. Why apologize for these things, or for paying a premium price for premium professors, or for charging a premium price for the opportunity to study with such professors and sharpen your brains with premium classmates?

His next post offers the short version. Remember folks, it's about quality. It's about the intellectual enterprise. The mid-majors can play that game too. To wit:

Short form, example 3, theory class. "Can we practice with some Jacobians?" Hal Varian and David Kreps leave the nastier bits out of their texts ...

I will add another example from here at WIU. In my advanced macro class sometime last year came the request, "Can you suggest more classic papers that we can read?"

Furthermore, my current intermediate macro class is asking some of the best questions I've ever fielded in that course (which I have taught quite a few times).

You get out what you put in. Higher education is not dispensed like water from a tap. You must be prepared to go to the well. We will show you the way.

Senators Schumer and Graham may be standing down... for now. (Reuters)

WASHINGTON (Reuters) - A Senate vote this week on a controversial bill threatening to impose steep tariffs on Chinese exports to the United States was put into doubt on Tuesday after the bill's authors said they were unsure whether to press ahead with the vote.

Sen. Charles Schumer, a New York Democrat, and Sen. Lindsey Graham, a South Carolina Republican, told reporters after a meeting with U.S. Treasury Secretary Henry Paulson they need to have further discussions before making a final decision on whether to hold a vote.

"He's certainly given us food for thought. There's no question about that," Schumer said.

Maybe he told them to read his speech. Elsewhere in the Reuters article....

There is no similar legislation in the U.S. House of Representatives, which would also have to pass it for it to become law. The Bush administration has opposed the Senate bill but has not explicitly issued a threat to veto it if it is approved by Congress.

And there is no way that the House will even think about this before the election or during a lame duck session. That would explain why the White House has not explicitly said they would veto the bill. There is no reason for the White House to give this the time of day right now. Of course they also might remember that...

The latest deadline is September 30, but the two senators have agreed four times since April 2005 to delay a vote.

Senators Schumer and Graham could own this issue for years to come. They appear to have settled into an equilibrium that serves their purposes.

Enjoy the free lunch from the Wall Street Journal. Richard Epstein and Michael Reich debate the minimum wage, particularly as it relates to Mayor Daley's decision to veto a minimum wage that would have applied to big-box stores in Chicago.

I found the following exchange to be the highlight.

Reich:

I agree that higher minimum wages might lead to somewhat higher prices. But this might be a good tradeoff. To find out, again we must draw from careful empirical studies, not general statements, to quantify the effect. My San Francisco study found that a 26% increase in the minimum wage increased restaurant prices by about 2.5%, or 25 cents for an average $10 menu item. We now know, using Wal-Mart's own data, that if Wal-Mart's hourly pay and benefits scale increased to match those in its industry as a whole, and the costs were fully passed on to consumers, its prices would increase by only a penny on the dollar. Moreover, profit margins have been increasing in large retail companies, so there is room for pay increases that do not translate entirely into price increases. See "Wrestling with Wal-Mart: Tradeoffs between Profits, Wages and Prices."

On the issue of turnover costs, no one is arguing that low-wage firms would individually choose to increase their pay and lower turnover, as the savings would not be sufficient. If all firms are required to do so, however, employment can actually increase. In the field of labor economics, this is a standard argument used to understand minimum wage effects. You will find it in every major undergraduate textbook, including those by free-market-oriented economists such as George Borjas and David MacPherson. You will also find an emphasis on turnover issues in understanding labor markets in the 2006 Economic Report of the President.

Epstein:

On the Wal-Mart profit figures, the numbers that I have seen differ. The average profit per employee is around $2,000 per year. That hardly speaks of massive exploitation of workers. Rather it is consistent with the lower prices that it offers to consumers, often from the least advantaged areas, where prices are estimated at around 8% to 13% below what they would otherwise be. Finally, I am totally puzzled why any labor text would argue that high-wage-low-turnover strategies are only efficient if everyone in town adopts them. The brief explanation that Michael offers here is just not credible.

Why won't the savings be sufficient to induce the change? Indeed any change in position, however small, that improves output should be welcomed, period. There is no prisoner's dilemma game here. A firm that gets higher output from adopting superior strategies should be thrilled if its competitors lag behind. So absent the statute, there should be a really strong incentive to make changes in employment strategies that other firms cannot duplicate. Nor is there any reason in theory to expect non-covered firms to raise wages unless demand for labor increases as the cost increases. It is every bit as likely that non-protected workers will be more numerous and could easily receive lower wages, if they stay in the community at all.

Read it all.

Tim Duy is not impressed.

OK, so they don’t completely know which way the economy is headed; not entirely unexpected, given that the US economy is almost certainly at an inflection point (although I like to see a bit more confidence from my central bankers, or at least another explanatory sentence). But I would expect the Fed to have a better handle on the inflation situation. Unfortunately, the third paragraph doesn’t leave me very confident on that front either. In the first sentence, energy prices have the “potential to sustain inflation pressures.” In the second sentence, inflation pressures are likely to moderate due to the “reduced impetus from energy prices.” What? WHAT!?! Are energy prices contributing to inflation or not? Shouldn’t the FOMC have an opinion on the impact of energy prices on inflation?

He's got a point. My reading of it was that they moved one of the statements about energy prices from the 2nd to the 3rd paragraph to reflect their thinking that energy prices are more likely to moderate and thus help us out on the inflation front rather than hurt us on the growth front. The line that energy prices have the potential to sustain inflationary pressures could be seen as a hedge. But that would beg the question of whether the press release is an appropriate place to hedge. I'm with Tim on that.

He also says,

In any event, this mixed message stuff is not exactly credibility enhancing.

I'll go so far as to say that the apparently contradictory statements on inflation are odd. However, divergent opinion (we know of one dissenting vote--we do not know the overall tone of the discussion) is not what could destroy their credibility. Of much greater long term consequence for their credibility is whether they follow through on what they say they will do--namely to address changes in the balance of risks according to new information.

As I wrote recently,

Everyone needs to remember that transparency in the process does not imply certainty over the outcome.

Or, in a similar vein, ambiguity does not automatically mean less credibility. So, taking Tim's comments as a jumping-off point, it's time for a discussion of how much transparency we want from the Fed and how much ambiguity we can tolerate.

Let's cut to the chase. The ultimate in transparency (short of televising the meeting, which is most assuredly not going to happen) would be for the FOMC to release the "Greenbook" along with the press release. The Greenbook is the document that contains the staff forecast and is made public with the transcripts after a five year delay. Now we could debate whether it would be a good idea to make this information public. The point is that if we had that information along with the outcome of the policy decision, we would know in real time whether they are behaving in a manner consistent with a given (forward looking) policy rule.

At that point, for the sake of credibility, you might as well go all the way and institute a policy rule.

The increased transparency of the last decade has been very welcome. It has focused the spotlight on the Fed in a way that has disciplined the organization. When I look at what I teach my classes about the Fed from principles through the graduate level, I am often amazed at how much more sophisticated it is than was even possible when I was an undergraduate. We simply have more information, and we have that information instantly at our fingertips. When William Greider's Secrets of the Temple was published almost 20 years ago, the Fed was not subject to the daily scrutiny of the 24 hour financial press, the bloggers, and so forth. Public awareness and interest in the Fed is running quite high these days. Perhaps we can thank Greider for shining the light on the Fed. Certainly the mystique of Chairman Greenspan, especially after his handling of the 1987 stock market crash, had a lot to do with it. But ultimately it was the institution, led by Greenspan, that took on the challenge of making its actions known for the benefit of all. Even though they knew it might restrict them in the future. These are small steps towards a commitment mechanism.

However, the job isn't done. As the minutes of the August meeting make clear, the Fed is taking a long look at its communication policy. The experience of the last decade suggests that the more we know about what goes into the decision (this we learn from "Fedspeak") and the faster we know the decision (press releases and minutes), the less latitude they have to do things that are out of line with our expectations. Transparency enhances credibility at the cost of tying your hands. ("Measured pace," anyone?) However, tying your hands without a clear objective in mind could lead to trouble.

And so they should review their communication policy. Today's press release was a little problematic in the ways that Tim Duy points out. But even so, today's press release was more enlightening than the months worth of "measured pace" statements that, as I have said before, painted them into a rhetorical corner, unable to raise rates faster or slower than 25 basis points per meeting for fear of spooking the markets. That was not their finest hour in terms of communication skills either.

Personally I'd prefer that they release the Greenbook right away, issue a longer press release detailing some of the discussion of the Greenbook and clearly define their objective function. But that isn't likely to happen soon, so we will have to settle for some occasional abiguity to make sure that they don't get tangled up in their own rhetoric as they navigate between their dual, and sometimes conflicting, objectives.

UPDATE: New Economist is also unimpressed with today's statement.

FOMC press release

Mark Thoma does the line-by-line comparison. The 30 second summary of which is that the housing slowdown is no longer regarded as "gradual" and that energy prices are not as much of a concern as they were previously. As a result, energy prices are now mentioned in the paragraph on factors moderating inflation (because they seem to have stabilized) rather than factors moderating growth (as when they were still climbing).

On a related note, oil was down again today.

And despite the fact that Jeffrey Lacker dissented again, preferring a 25 basis point increase, there is a growing chorus of those anticipating a rate decrease in the next few months.

PIMCO has heard both sides and takes the middle road. (Reuters)

CHICAGO (Reuters) - The Federal Reserve could keep benchmark interest rates steady for some time given its focus on pulling down inflation, said Paul McCulley, managing director of the bond fund PIMCO.

"The hurdle to starting an easing process is high, because the Fed actually does want to see softer employment growth," McCulley said in a research note released on Wednesday.

"A deceleration in growth is not necessarily sufficient on its own for the Fed to start easing, particularly when the Fed wants inflation to actually come down rather than just stop going up," he said.

For the easing cycle to start, McCulley said the risks of an economy-wide recession must be more apparent. "Those risks aren't there at the moment, and on our base case forecast, they won't get there over the cyclical horizon," he said.

I know some people who would disagree strongly. However, McCulley makes two statements that seem to be on-target. While a single cut at the top of the cycle would not be totally uncalled for, it isn't likely that the Fed will start a pattern of cutting unless the economy visibly takes a turn. (Whether employment is the key variable is another matter on which I'm not so sure--employment tends to lag... they will be looking for weakness on a variety of fronts.) And second, the Fed does want inflation to come down rather than stay where it is.

But my usual advice applies. Don't pay too much attention to interest rate forecasts going out more than a few months, and even then I'd play it cautiously. We are still way too data dependent. Steady as she goes for a few more weeks, watching the housing market as well as the inflation numbers, trying to steer a course between them--hoping that no exogenous winds of change blow them off course.

Postscript: Brad DeLong writes:

Good luck, Ben and company...

Subtitle: One nasty little shock away from recession (thank goodness)

First, look at Tim Duy's take at Economist's View. Solid analysis and a couple of great lines worth quoting.

Are Fed officials just clueless? Don't they see that the end is coming? I think not – I bet Fed officials are not working overtime to spin a negative story out of every number...

and

If you forced the Fed to choose between cutting rates and hiking rates, they would choose the latter. Luckily, they can choose to pause as well.

I agree. Talk of recession is everywhere. A data point that comes in with slower growth, but growth nonetheless (the ol' "increasing at a decreasing rate" as I like to tell my macro classes) leads some to put on sackcloth and ashes. One certainly has to look at the broader picture, as James Hamilton has done, for example.

Yes, the point is often made that the Fed's record at producing a soft landing is a bit weak, with the only real success being in the mid '90s. Some say that overtightening in the late '80s brought on the 1990-91 recession. I agree that it was certainly a contributing factor. But that makes them 1 for 3 in the last 20 years (2001 being the other negative result). But I'm not sure that I'd look at the scenarios of the 1970s or the early 1980s as being similar enough to that of the last 10 years to want to make the comparison. Could Chairman Volker have managed a soft landing instead of a recession with the lousy deck of cards that he was dealt? Bernanke isn't sitting on a royal flush, but by the same token this clearly isn't 1979.

Whether or not a recession occurs is probably going to be due less to Bernanke's skill or lack thereof than it will be due to whether or not some additional exogenous shock hits the U.S. or world economy. I don't think I'm alone in saying that despite my overall optimism, I am not at all squeamish about saying that we are one nasty little shock away from a recession.

And that brings us to the news of today. Here, CNN channels Reuters:

NEW YORK (Reuters) -- The Thai baht staged its largest one-day fall in three years Tuesday after Thai armed forces ousted the prime minister, sparking a broad decline in a number of Asian currencies.

...

Prime Minister Thaksin Shinawatra, who was in New York to speak at the United Nations, declared a "severe state of emergency" in a broadcast on Thai television.

Looking ahead, the market will watch to see whether the Thai crisis prompts investors to abandon other risky emerging market trades.

The dollar would be the main beneficiary in such a scenario, said Divyang Shah, strategist at IDEAGlobal in London, as it is "not only a high-yielder but is also an attractive safe haven."

But other market participants said solid economic fundamentals in Thailand and other emerging Asian markets make a mass rush for the door unlikely.

"There's been an immediate reaction and people will move to the sidelines to see how it all unfolds, but what we'll see will probably be a short-term disruption," said Upadhyaya.

...

Karl Jackson, president of the U.S.-Thailand Business Council, said the country has experienced a military coup 17 times since 1932.

"Basically before democracy came to the forefront, this was the their way of changing the government and it continues," said Jackson, who is also director of Southeast Asia studies at Johns Hopkins University.

"There might be a momentary glitch on the part of investors, but as in previous coups, investment and property rights won't be affected. If the coup is successful, I expect everything will be normal in the morning," he said.

Still, investors were watching the situation closely, since the Asian currency crisis in 1997 started with the devaluation of the Thai baht, then grew into an international economic slowdown.

Yes, it may be that everything will be normal in the morning--except perhaps for Mr. Shinawatra. In all likelihood this will not cause the sort of contagion that took place when the baht collapsed in 1997. But as I read the news coming out of the Asian markets tonight as their trading day comes to a close, I can't help but get the feeling that someone is looking over my shoulder and saying, "Made you look!"

Yes, indeed I looked. Because if there is trouble to be made for the U.S. economy, or the world economy for that matter, it will be made by that unexpected exogenous shock. The straw that broke the camel's back--a classic non-linearity. Maybe not today. Maybe not the baht, but it made me look.

For the last year, I've been cautiously optimistic that we could avoid a hard landing, and to this point it would seem that we have. However the tensions of the last year or two (rising interest rates, rising then falling housing markets, questions about the health of the labor market, etc.) are beginning to give even the optimistic among us a little cause to look over our shoulder once in a while.

Yet, this is something we may have to get used to every decade or so. We have not eliminated the business cycle, but we have tamed it a little. That is going to mean sailing close to the rocks now and then. As long as we keep inflation low and stable, there will be less need for major course corrections. A soft landing, while not assured, is then possible if you are fortunate. It's nerve-racking, but it's better than the boom-and-bust alternative that comes from chasing the Phillips curve too hard.

Thus it is all the more important for the Fed to stick it its inflation fighting guns. As Tim Duy said, given a choice between raising and lowering rates, they would probably raise. That would be my choice as well. But given the increased uncertainty about the effect of the housing slowdown and the lagged effect of past rate increases yet to be felt, keeping rates where they are at this point in time (with a bias toward tightening) is an even better idea. Keeping inflation low and stable is the best thing the Fed can do to ensure that we are one nasty little shock away from a recession more often than we are rushing headlong into one.

At EconLog, Bryan Caplan writes:

Whenever I'm stuck in a line, I grumble about the need for peak load pricing. Raise the price during popular times, cut the price during off-times, and watch the world's blood pressure fall.

I have the same urge to grumble. Read the whole thing for his idea for a better way to price admission to the movies. Seems reasonable to me.

This is nice to see. Norman Borlaug has received some press lately. In the Opinion Journal...

Who? Norman Borlaug, 92, is the father of the "Green Revolution," the dramatic improvement in agricultural productivity that swept the globe in the 1960s. He is now the subject of an admiring biography by Leon Hesser, a former State Department official who first met Mr. Borlaug 40 years ago in Pakistan, where they worked together to boost that country's grain production. "The Man Who Fed the World" describes, in a workmanlike way, how a poor Iowa farm boy trained in forestry and plant pathology came to be one of humanity's greatest benefactors.

...

Whether bread induces peace is a question for another day. It certainly kills hunger and saves lives. Contrary to Mr. Ehrlich's bold pronouncement, hundreds of millions of people did not die for lack of food. Far from it. Despite occasional local famines caused by armed conflicts or political mischief, food is more abundant and cheaper today than ever before in history. It is an absurd travesty that Mr. Ehrlich is still much better known than Mr. Borlaug, but perhaps Mr. Hesser's biography can begin to right the balance.

Mr. Borlaug is still tirelessly working to keep hunger at bay. He remains a consultant to the International Maize and Wheat Improvement Center in Mexico and president of a private Japanese foundation working to spread the Green Revolution to sub-Saharan Africa. He believes that biotechnology will be crucial to boosting world food supplies in the coming decades and decries the underfunding of the world's network of nonprofit agricultural research centers.

He also laments the unnecessary suspicion with which biotech is treated these days. "Activists have resisted research," he notes, "and governments have overregulated it." They both miss the point. "Responsible biotechnology is not the enemy: starvation is."

And in The Economist...

NORMAN BORLAUG, who won the Nobel peace prize in 1970 for his role in the green revolution, remains as sturdy and “high-yielding” as the varieties of wheat he helped to invent. Last week, at the age of 92, he gave a stirring lecture in Washington, DC, calling for a renewed effort to bring his revolution to Africa, the one continent it bypassed first time around.

The Economist does not mention Hesser's new biography.

The Canadian Broadcasting Corporation posted this on their blog. (I didn't know the CBC had a blog. I may have to check that out more often.)

Joining forces with the Rockefeller Foundation, the Gates foundation will immediately pump $150 million into seed research. Already the Rockefeller scientists say they have a developed a new strain of rice that could increase yields in West Africa five times.

...

Noting Borlaug's work took 20 years before it met with ultimate success, Bill and Melinda Gates promised their foundation will stay the course in the fight against African poverty.

It's clear the world's richest countries have not dented African hunger and poverty.

Private sources and philanthropy will finance Borlaug's ideas that worked so well years ago.

Give them better seed and resources. Help them grow more food.

Finally, for those who desire even more, the presentation links are here (transcript, video, and slides).

Here's the best quote about a principles course that I've seen in a while. The Harvard Crimson reviews Greg Mankiw's Ec 10 course.

...it teaches concepts that will seem so intuitive you’ll be embarrassed by how little you knew before taking the course.

Hat tip to Greg Mankiw, of course.

Pluto has been demoted to a minor planet and the object which was nicknamed Xena is now named Eris. Eris is the Greek goddess of discord and strife. That is a fitting name since its discovery seemed to be the catalyst for Pluto's demotion.

Just when you think you've heard the most bizarre airport security stories... (WCCO.com)

(AP) NEW YORK British author J.K. Rowling says she won an argument with airport security officials in New York to carry the manuscript of the final "Harry Potter" book as carryon baggage.

Had security agents not relented, she said on her Web site, she might not have flown, she said in a posting dated Wednesday.

"I don't know what I would have done if they hadn't — sailed home probably," she wrote.

The author had participated in a book reading for charity on Aug. 1 with fellow writers Stephen King and John Irving. Security was drastically tightened after Aug. 10 when British police said they had intercepted a plot to blow up U.S.-bound airliners.

"The heightened security restrictions on the airlines made the journey back from New York interesting, as I refused to be parted from the manuscript of book seven.

"A large part of it is handwritten and there was no copy of anything I had done while in the U.S."

Eventually, she added, "They let me take it on, thankfully, bound up in elastic bands."

Would someone please explain to me how wrapping elastic bands around a book manuscript makes it less of a security threat? Couldn't she use the rubber bands as a weapon and take someone's eye out? Were they afraid that she might toss the loose papers in the air to create a distraction? What, I ask you, could possibly be the threat from a bundle of papers?

Unbelievable.

Time for another economic Rorschach test. Retail sales increased by 0.2% in August. Considerably lower than the 1.4% increase in July, but many forecasters were expecting a decline. How you interpret this says a lot about your outlook on the economy.

So let's look at how the media is treating the news...

Wall St. Journal:

U.S. retail sales unexpectedly increased during August after an early-summer surge even though gas-station sales fell and consumers slowed furniture purchases.

...

"Remember how we all thought that consumer spending would eventually tank, weighted down by high energy costs and the end of the housing boom?" asked Joel Naroff of Naroff Economic Advisors. "The rumors of the consumers' demise remain just that," the economist said, citing prices -- not a lack of demand -- as the reason for soft spending gains.

...

Stephen Stanley, chief economist at RBS Greenwich Capital, said that gasoline prices have fallen by nearly 50 cents per gallon since hitting their highs in early August. He said this should provide a big boon to consumer spending in coming months.

"Consumer spending is going to explode, probably in September, October and maybe November," he predicted.

Looks like they see the glass as half-full. Now to the NY TImes...

WASHINGTON (AP) -- Retail sales in August posted the weakest showing in two months as worried consumers curbed their spending habits.

How's that for an opener?

The Commerce Department reported that the nation's retailers saw a tiny 0.2 percent increase last month following a much bigger 1.4 percent rise in July. It was the weakest performance since sales had actually fallen by 0.5 percent in June.

...

The tiny 0.2 percent rise in retail sales in August was slightly better than analysts had been expecting. They were forecasting an outright decline in sales of around 0.2 percent.

Can someone buy them a thesaurus? Is using the word "tiny" twice in this story a bit of overkill?

...

While the sharp slowdown had raised concerns of a possible recession, economists have grown less concerned about that possibility because of a retreat in oil prices, which have declined significantly from their mid-July highs.

The decline in gasoline prices is expected to show up in stronger retail sales in coming months as consumers have more to spend on other items because they will be paying less to fill up their tanks.

Stephen Stanley, chief economist at RBS Greenwich Capital, said that gasoline prices have fallen by nearly 50 cents per gallon since hitting their highs in early August. He said this should provide a big boon to consumer spending in coming months.

''Consumer spending is going to explode, probably in September, October and maybe November,'' he predicted.

For the record, the WSJ story is by Jeff Bater. The Times took theirs from the AP. The Times starts out in a very depressing tone but then works in the same quote from Stanley. Two uses of the word "tiny" followed by a statement that economists are less worried about recession. Looks like they want to see the glass as half-empty but do not want to totally ignore the positive. I think they are hoping you will be so discouraged by the first paragraph that you'll just move on.

Finally we have CNNMoney.com...

Retail sales rose moderately in August versus forecasts for a decline, the government said Thursday, but the gain was tempered by a slowdown in auto sales.

To me this is the most reasonable and accurate opener of the three. Later in the article...

"I am puzzled by this report. There seems to be somewhat of a disconnect," said Scott Hoyt, economist with Economy.com, noting he expects the government will revise retail sales for September lower later this year.

"Whenever you've got a strange disconnect like this, you almost always have to anticipate it," Hoyt said.

Ian Shepherdson, chief economist with High Frequency Economics, seemed to agree.

"Overall, this report is softer than it looks,' Shepherdson said in a note. "The headline is flattered by an inexplicable increase in auto sales, which cannot be squared with the 6.3 percent drop in unit sales reported by the automakers. Expect a downward revision."

At the same time, the recent retreat in gas prices helped to divert consumers' dollars and lift sales of products in other discretionary categories.

Sales at gas stations fell 1 percent last month compared to a 1.6 percent gain the previous month.

Food and beverage sales rose 0.6 percent. Sales of sporting goods, books, music and movie DVDs increased 0.8 percent. General merchandise stores posted a 0.4 percent gain.

While the drop in gas prices is clearly a plus for consumer spending, Hoyt pointed out that energy costs, including gasoline, typically represent only about 7 to 8 percent of the household budget.

"It's easy to overdo the gas price effect," Hoyt said. "Housing has a more serious consequence on spending patterns because slowing housing activity has an adverse effect on household wealth and mortgage equity withdrawals. With a cooling housing market, consumers have less cash to pull from their homes to spend elsewhere like electronics and furniture."

This article did a really nice job of tying it all together. I'd say it's more of a glass half-empty story. Sorry to disappoint you. But it is quite reasoned and consistent.

What do you think about the contrast between Stanley in the Journal and Times articles and Hoyt in the CNNMoney article? Is consumer spending going to "explode" now that gas prices are coming down? Or does the fact that gasoline (and energy in general) make up a relatively small fraction of the total household budget mean that we should be careful about reading too much into that? Is this a case of a report that is so anomalous that we should expect a revision and discount it until seeing if that revision is made?

If you want to tackle these questions or if you have other sightings of half-full vs. half-empty thinking, post them to the comments.

In other news, initial jobless claims hit a seven week low. That makes me a bit more confident in thinking that the labor market still has a bit of life left in it.

UPDATE: Commenter "zinc" inspires me to look at the confidence interval for this estimate (something that I do not recall seeing anyone in the MSM or the blogosphere cite either). So, for the curious, here is a link to the Census Bureau news release. Go to the link for the complete tables and charts. Here is the summary:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for August, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $368.2 billion, an increase of 0.2 percent (±0.7%)* from the previous month and up 6.7 percent (±0.7%) from August 2005. Total sales for the June through August 2006 period were up 5.6 percent (±0.5%) from the same period a year ago. The June to July 2006 percent change was unrevised from +1.4 percent (± 0.3%).

Retail trade sales were up 0.2 percent (±0.7%)* from July and were 6.6 percent (±0.8%) above last year. Nonstore retailers were up 12.5 percent (±4.5%) from August 2005 and sales of gasoline stations were up 11.0 percent (±2.0%) from last year.

As they point out...

* The 90 percent confidence interval includes zero. The Census Bureau does not have sufficient statistical evidence to conclude that the actual change is different than zero.

In all of the excitement from the cheerleaders and the doom-and-gloom from the pessimists, I did not once see anyone mention the confidence intervals. (Correct me if I'm wrong and missed it somewhere.) As the MSM articles I cited make abundantly clear, the MSM certainly didn't take the time to worry about such things (nor did the analysts they quoted).

Now, that is not to say that the data is useless. The overall trend paints a better picture. One data point alone does not provide a lot of information. In fact this one really makes me wonder about whether and how much it will be revised. James Hamilton looks at the trend and comes to the same conclusion that I do... that this is much ado about nothing.

This is why we have blogs and why blogs have commenters.

To answer "zinc"'s other questions, these are nominal (not real) and the widely quoted 0.2% is monthly.

UPDATE 2: Mark Thoma has even more.

No more top hat and thimble in the newest version of Monopoly. (NY Times) Now you can have McDonalds fries and a Starbucks coffee.

James McGregor writes in the Wall St. Journal commentary:

So what should an insecure and out-of-sorts superpower and a paranoid and increasingly pugnacious aspiring superpower do to avoid a collision?

Hint

Read the article....

UPDATE: ....and this one too.

There are a couple of things worth noting here. First of all, I was not aware of this open access medical journal, PLoS. I figure that a few of you might not know of it either, so now you know.

Anyway, I tracked it down from this story on MSNBC.com. The article is on the vast differences in life expectancies across geographical areas of the country. The authors then break down the data into "eight Americas" based on income and race. Hawaii scores well, but the south does very poorly. Of course one can easily criticize this as leaving out many potential other explanatory variables. For example, If industrial pollutants reduce life expectancy of all races but are concentrated in counties of a certain racial makeup, that would be useful to know. (I confess to having no knowledge of whether this would be a significant issue, but an enterprising person with a map of chemical factories could find out in a hurry.) The authors do identify access to health care, even among low-income rural areas of the northern states (e.g. my old stompin' grounds), as being an important positive factor contributing to life expectancy. Food for thought.

For the curious, their life expectancy data is available.

Other articles in this issue of the on-line journal look interesting as well, including a study comparing outcomes in academic medicine (i.e. teaching hospitals) and non-academic medicine.

I commend this journal for making medical studies more accessible to researchers, including those in other fields who will benefit from easy access.

Frequent commenter knzn has a blog. New commenter Bill Conerly has one as well. I've also reorganized the blogroll. I used to keep a category of reciprocal links for blogs that link back here. But it got out of date, and it's easier to just have a big long list for blogs that are "mostly economics".

UPDATE: One more... Creative Destruction which looks like a group blog from Gettysburg College.

UPDATE 2: I just received an e-mail from RGE Monitor informing me of a new blog over there called Economonitor. Looks like it will be a good one.

Via Reuters:

BOSTON (Reuters) - The U.S. economy is growing robustly despite a slowing housing sector, although inflation remains above the central bank's comfort level, two top Federal Reserve officials said on Monday.

Making separate appearances at a business economics conference, Cathy Minehan and William Poole, heads of the Boston and St. Louis regional Fed banks respectively, sounded relatively optimistic about the economic outlook.

But while Minehan focused more extensively on the softness emerging from a decline in home purchases, Poole appeared a bit more worried about the possibility that inflation could gallop outside the central bank's grasp.

Stressing the importance of maintaining Fed credibility, Poole said inflation was running above the range he would prefer to see, and said that if it did not ease over the next 18 months that he would rather "act earlier rather than later."

Minehan's speech

Poole's speech

I have been thinking about what kind of post to write today. I didn't post on the 4th anniversary of 9/11, and I wasn't yet blogging on the 3rd. I remember thinking last year that I would save it for next year. It's next year. But what can I say that hasn't been said?

Perhaps there is value in saying what has already been said. Take a look at posts from Russell Fox, David Tufte, and John Palmer. Each one a personal reflection, each one expressing thoughts or retelling events that we have heard before. But each one as individual as a fingerprint. As we stop to remember a moment of profound national grief, we take heart in the fact that we were (and are) not alone. Our neighbors went through similar emotions. In some small way that is comforting.

It was a beautiful day in New York as well as in Illinois. Indeed, the clear weather across the country was instrumental in allowing air traffic controllers to clear the sky as quickly as they did that day. I watched the morning's events from the perspective of a licensed private pilot and aviation enthusiast. When I saw the amount of smoke and the size of the hole in the tower, I knew it was a large jet. It was on the north side of the tower only about 1000 feet off the ground. There is no approach path that takes you that low over the southern tip of the island. The weather was perfect. This was no accident. When the 2nd one hit, we all knew it was coordinated.

By noon the television coverage was becoming repetitive and speculative. With no training in aviation or engineering, most of the talking heads were in way over their heads. I could take no more, and I had a class to teach. It was a course on international monetary economics. We talked about the event itself and discussed what the Fed would do (lower interest rates) and wondered how long it would take for Wall St. to get back up and running. There was little worry among my class that this would trigger a global financial crisis. Fortunately we were right.

As I drove home I passed by long lines at the gas pumps in Peoria. My route home on highway 24 paralleled the only contrails in the sky. Air Force One and its fighter escort were heading back to Washington from Offutt AFB. Knowing what had happened and seeing those contrails gave me an eerie feeling. It was a connection to the horrible events of that day that I could see with my own eyes, not on television. Here, right before my eyes, the president was being escorted back into what was for all practical purposes a war zone by aircraft armed and ready for battle.

My gas tank was nearly empty, so unlike many of the drivers in line back in Peoria who were just topping off before prices jumped, I would have to fill up. I was the only one filling up at the gas station close to home. They had not raised prices (at least not that I could tell), and they were not running out of gas. That night my wife and I drove back to Peoria to church and passed by numerous gas stations with bags over the pumps, thus providing me with a real-world example of response to uncertainty that I use in my principles classes to this day.

And it was that uncertainty that enveloped the country as night fell. Rumors flew everywhere. False alarms caused evacuations in other buildings. What would 9/12 bring?

Although 9/12 did not bring more carnage, we know we are still vulnerable. Madrid and London stand as reminders of that fact. But the truth is that life on earth has never been guaranteed. Tomorrow is uncertain, just as it was on 9/11/2001. The next life-changing disaster may be a terrorist attack, or it may be an earthquake or tsunami. It is prudent to take steps to protect ourselves from all of those calamities. A good security screening program is as important as a tsunami warning system. But banning fingernail clippers from airplanes makes about as much sense as keeping people a thousand feet back from the water at all times just in case of a tsunami. Finding the right balance is everything, and our record has been hit-and-miss. We need a renewed call for open, honest, and fact-based dialogue on these issues.

We can learn to live with uncertainty without being ruled by fear.

The Virtue of Capitalism (Townhall.com)

h/t Marginal Revolution

The NY Times has this to say:

Dr. McClellan wins praise from some Democrats and leaders of advocacy groups for focusing on important policy issues and responding to valid complaints. Some critics disparage him for toeing the administration line too uncritically. But even they think they will be lucky to get anyone so accomplished as his successor.

Mark McClellan was on the faculty of the economics department at Stanford before heading the Food and Drug Administration. He is one of a rare breed of Ph.D. economists and M.D. physicians. Grad school in economics AND medical school! Here is his bio from the HHS website. See it now, since it will probably disappear when he leaves.

For part I, see here.

My focus was, as usual, on the merits of gradual rather than sudden yuan revaluation, and I come to that conclusion mainly from considering how fragile the Chinese banking system is and how a gradual revaluation really will help them in the long run. Yes, the yuan is undervalued. No, it should not remain that way forever. But I think that as Tyler Cowen suggests, it's a waste of political capital for American politicians to keep harping on it. When the yuan appreciates, it will not be because we told them to. I know we have big egos, but come on. Don't get me wrong. I understand why a hard line stance on the yuan makes sense politically. Therein lies the problem.

But Cowen also made some comments that I don't find as convincing when he downplayed the effect of a revaluation.

The belief is that if the dollar has less value in China, Americans will spend less on Chinese products to offset the prices they pay per item. But even if the numbers work out so that the flow of dollars to China diminishes, American consumers will pay higher prices and see fewer goods from China. Yuan revaluation is unlikely to benefit the United States, even if it does lower its trade deficit.

The trade effects of a revaluation of the yuan are unlikely to be large, in part because many Chinese exporters specialize in assembly. China sends out money buying components like semiconductors and turns them into finished goods, thereby running a trade deficit with East Asia. A new and higher value for the yuan would largely be a wash for these activities. With a stronger currency, China would have a harder time selling its electronic goods, but this would be offset by its greater purchasing power over the semiconductors. It would not do much damage to the Chinese competitive position.

See the discussions at numerous blogs: Brad DeLong, Brad Setser, Greg Mankiw. (Mankiw does not take Cowen's assertion about the small effect of a revaluation head on in his post. His post is more about the benefits to the U.S. of an undervalued yuan.) Cowen responds that he is still "skeptical" about yuan revaluation, and throws in another line that is more to the point I have been making:

My view is not that China should stay put on all matters of economic policy (see today's FT for an excellent article on the internal Chinese debate); rather my argument is that the U.S. won't do a good job micro-managing Chinese reforms.

Precisely. But I'm less skeptical about the effect that revaluation might have for the U.S. On that score, I fall somewhere between Setser and Cowen, probably leaning towards Setser. I just don't think that outweighs the substantial case for encouraging the Chinese to take a gradual approach--as long as they reach the goal in the end. And I think Cowen gets one more thing right:

The fundamental problem in the U.S., to the extent we have one, is our propensity to spend, especially given our long-run demographic position and our government's fiscal irresponsibility.

So when Brad DeLong says:

We should be moving toward Andrew Samwick's policy of a cyclically-appropriate on-budget government surplus in order to put downward pressure on domestic absorption, and we should be strongly advising the Chinese and others to shift from export-led growth and allowing their real exchange rates to adjust, in order to reduce the risks of a really unpleasant episode.

I can at least sign on to the first part.

San Francisco Fed President Janet Yellen remains confident that inflation is under control, but rising unit labor costs give her pause.

This brings me to the outlook for inflation. As I've indicated, core consumer inflation has been a bit above my comfort zone recently. Therefore, in keeping with the Committee's responsibilities for promoting price stability for the nation, I believe it is critical that inflation trend in a downward direction over the medium term. Indeed, my expectation is that this is the most likely outcome.

That said, I must admit that I'm also less sanguine than I was a month ago about one particular factor in the inflation process—namely, labor compensation. This factor is a major component of business costs and can therefore affect the prices that firms charge for their products. A month ago it appeared that compensation was growing quite modestly. Moreover, for nonfarm businesses, markups of product prices over costs have been near historic highs, which means that businesses have had room to absorb higher costs rather than passing them on to their customers. These two developments together gave me considerable comfort in thinking about the inflation outlook. However, recently revised information on compensation per hour suggests that wages and benefits are growing rapidly. This blurs the picture considerably, since another measure, the Employment Cost Index, shows only moderate growth....

...

This leads me to the concluding topic in my presentation today—monetary policy. As you know, in August the FOMC decided not to raise the funds rate for the first time in more than two years. I think this was the prudent course of action that properly balances the dual mandate given to the Fed by Congress—to foster price stability and maximum sustainable employment.

Given that inflation is outside of my comfort zone, why do I think it makes sense to pause? In these circumstances, it might be thought that policy should continue to tighten until the inflation data move back to a rate consistent with price stability. But I would argue that a gradual approach is likely to be better because there is a need to incorporate lags between policy actions and effects on the economy. We don't know what the lags are with precision, but we still need to do the best we can to take them into account. We simply don't get the necessary feedback on the effects of our policy actions for a long time. So if we kept automatically raising rates until we saw inflation start to respond, we most likely would have gone too far, which would unnecessarily endanger the economic expansion. Instead we need to be forward-looking.

And, by a variety of measures, it appears that the current stance of policy will move inflation gradually back to the comfort zone while giving due consideration to the risks to economic activity. By a variety measures, I'm referring to my forecast that I have outlined today, as well as the recommendations from commonly used monetary policy rules that are used to gauge the stance of policy. Taken as a whole, these rules indicate that the funds rate is currently within the range that appears appropriate, given the current condition of the labor market and the position of inflation relative to my comfort zone.

However, since all such approaches are inherently imprecise, policy must be responsive to the data as it emerges. The advantage of pausing is that it allows us more time to observe the data. When I say that policy should be responsive to the data, I mean that any additional firming should depend on how emerging developments affect the economic outlook. And when I say data, I don't just mean data on inflation, output, and employment. I also mean data on factors that might affect those variables in the future—such as energy prices, the dollar, the stock market, long-term interest rates, housing prices and inflation expectations.

The bottom line is this. With inflation too high, policy must have a bias toward further firming. However, our past actions have already put a lot of firming in the pipeline. With the lags in policy we haven't yet seen the full effect of our past actions. These will unfold gradually over time. By pausing, we allowed ourselves more time to observe the data and more time to gauge how much, if any, additional firming is needed to pursue our dual mandate.

Reporting on Yellen's speech, Greg Ip of the Wall Street Journal also informs us that two regional Fed banks (Richmond and Philadelphia) requested discount rate increases in the days leading up to the last FOMC meeting.

You can read the minutes from the Board of Governors here. (Remember, the Board decides the discount rate and the FOMC votes on the fed funds target.) Quoting from the minutes:

Directors who preferred to maintain the existing primary credit rate at this time pointed to slower economic growth, the lagged effects of monetary policy actions, and the stability of longer-term inflation expectations. Nevertheless, inflation pressures remained a concern for most directors, and they generally agreed that incoming data would be crucial in determining the appropriate stance of monetary policy going forward.

Directors in favor of increasing the primary credit rate noted that, while growth had slowed, it remained solid. In this light, they appeared to view the risk that inflation pressures would persist as outweighing the risk of a sharp deceleration in economic activity.

At today's meeting, no sentiment was expressed for changing the primary credit rate before tomorrow's meeting of the Federal Open Market Committee, and the existing rate was maintained.

After the FOMC meeting the next day, the Board decided to maintain the existing rate. Today's minutes answer questions that were raised back at Mark Thoma's place last month.

You can decide how much significance to place on the fact that two of twelve regional Feds wanted to continue increasing rates. I'm with Greg Ip in thinking that the support for the pause was "relatively broad." Remember also that it is the boards of directors of the regional Feds that make these recommendations. Their members are drawn from the business and banking community and have a pretty good handle on conditions in their region.

UPDATE: Calculated Risk covers the housing angle.

UPDATE 2: Bloomberg (channeled via the NY TImes) plays up the additional dissent:

WASHINGTON, Sept. 7 (Bloomberg News) — Two regional Federal Reserve banks favored an increase in the discount rate before the policy meeting on Aug. 8, a sign of greater dissent over current monetary policy than had previously been disclosed.

One (of five) voting regional banks dissented. One (of seven) non-voting banks wanted to raise the discount rate. I think that is fairly consistent with the broader opinion. I hesitate to make too much out of it, but you are free to make up your own mind.

From the NY Times editorial page:

Any move that makes the International Monetary Fund — and for that matter other major global institutions — look less like an old boys’ club is a good move. So the I.M.F.’s executive board began doing the right thing last week when it decided to give China, South Korea, Turkey and Mexico slightly larger voting shares — and promised them even more say to come.

A reapportionment is essential for bolstering the fund’s credibility. And it is long overdue. China represents about 15 percent of the world’s gross domestic product but has only a 2.9 percent voting share at the fund, which will grow to 3.7 percent. (Belgium, with less than 1 percent of the global economy, has a 2.1 percent share.)

...

The Bush administration, which championed the changes, is hoping that if China gains more of a stake in the global system it will have an incentive to behave more responsibly: allowing the yuan to strengthen against the dollar and reining in its export binge. China needs a more flexible currency, both for the sake of smooth trade relations — the system is pretty tetchy these days — and to gain more control over its economy. As long as China keeps the yuan artificially low, other Asian countries, eager to sell their own cheap exports, will too.

But the advice can’t stop there. The fund needs to take a closer look at who’s buying all those cheap goods and borrowing all that excess cash from China. China may be the enabler. But the United States needs to reduce its enormous trade deficit and its enormous budget deficit, to protect its economy and for the sake of global stability.

Ok, the sentiment is nice, but how much will these changes really affect the outcomes? Probably not much. It is, however, a step in the right direction. The makeup of the fund should evolve over time to reflect changes in the world economy. Decades from now we may want to enlist the help of a modern and developed China in the development of Africa. They will expect (and deserve) greater voice in those deliberations. We should welcome that.

I'm less sure about the argument that this will give the Chinese the "incentive to behave more responsibly." First of all, the American political definition of "responsible" in this situation is to allow a faster (immediate?) revaluation of the yuan. If you have done any amount of reading on China and know the first thing about the banking situation you know that the American political definition of responsible does not mesh with what the Chinese know that they need. Many economics blogs, including this one, have chronicled that story for some time, so I don't need to repeat it. Tyler Cowen sums it up quite well, also in the Times today. Cowen makes an additional point that is relevant to the Times editorial:

The Chinese keep the yuan low, relative to the dollar, by buying up United States Treasury securities; as of early 2006, the Chinese central bank held up to $470 billion in Treasury securities. This huge accumulation of relatively low-yielding assets is the investment strategy of risk-averse bureaucrats, but it may bring longer-term benefits. Those assets can someday be sold or otherwise transferred to underdiversified Chinese financial institutions. The accumulation gives the Chinese a stake in American prosperity and signals that the Chinese are committed to long-term participation in the global economy. On the American side, the Treasury market is more liquid and the budget deficit can be financed at lower cost.

Yes, you heard that right. Chinese ownership of U.S. assets signals a commitment to long-term participation in the global economy. One might even say that it would give them an incentive to "behave responsibly." In the long run, that is going to be as significant, if not more so, than a token increase in their IMF voting rights.

Maybe I was just looking for it this time around, but it seemed that the Beige Book is reporting more varied economic performance across regions. Maybe it was the first paragraph that set the tone:

Reports from the twelve Federal Reserve Districts indicate that economic activity continued to expand since the last report, but five Districts indicated deceleration while the remaining seven reported little change in the pace of growth. Some slowing in economic growth was seen in the Boston, New York, Philadelphia, Kansas City, and Dallas Districts, though Dallas still characterized growth as strong. Most other Districts reported continued modest growth, though Atlanta described activity as "mixed", Richmond observed that growth was "slow," while San Francisco noted a "solid" growth pace.

On labor markets, they had this to say...

Labor markets around the nation have generally been steady since the last report. Scattered labor shortages continued to be reported in a number of Districts, though these do not appear to have intensified, except in the Dallas District. Job growth was described as brisk in the Kansas City District, and recent acceleration was noted in the Richmond District. Labor markets were characterized as steady or expanding moderately in the other ten Districts. The Kansas City and Dallas Districts reported fairly widespread labor shortages while more specific shortages were cited in a number of other Districts: Cleveland indicated a shortage of truck drivers, Atlanta noted ongoing shortages of construction and hospitality workers along the Gulf Coast (where Hurricane Katrina struck a year ago); Chicago reported shortages of skilled manufacturing workers and engineers; and Minneapolis mentioned some shortages in Michigan's northern peninsula.

Wage pressures were reported in a number of Districts, though they were most often limited to certain sectors and most pronounced for workers with specialized skills. Overall increases in wage pressures were mentioned in the Philadelphia, Chicago, Minneapolis, Kansas City, and Dallas Districts. A number of other Districts reported sharp wage increases or wage pressures for such workers in occupations that are in short supply or for workers in particular industries, such as information technology (Boston), trucking (Cleveland), retail trade (Chicago), and financial and health services (San Francisco).

All of which is good if you think that job growth is proceeding at an appropriate stable rate. Last month's payroll numbers border on the low side of what most of us would think should be consistent with a report like this, suggesting that there is more going on here than initially meets the eye. Of course, if you're an inflation hawk, the above paragraphs might keep you awake at night. By the way, in case you hadn't heard yet, unit labor costs were revised upward to 4.9% (link to WSJ article). This one-two punch gave the market a bit of a black eye, though it is certainly not down for the count.

So what did the Beige Book say about prices?

Reports of sustained increases in the cost of metals, energy and petroleum-based products, and other raw materials continued to be widespread, although increases in energy costs were reported as moderating in the San Francisco District. Some Districts reported flat to declining prices for natural gas and a moderation in the price of steel. Manufacturers found little ability to pass through higher costs into the prices of manufactured goods, with the exception of energy-intensive goods and services as reported by the San Francisco District. Many Districts reported lower prices for apparel and electronic goods, and most Districts reported that retail prices remained steady.

As James Hamilton recently reported, commodity prices are starting to come down a bit. He attributes this to the realization that the incipient economic slowdown is more significant than first thought. Oil prices fell for a third straight day, and while Chevron's new discovery will not come on line for a few years, the market appears to be buoyed enough by the news that it has an excuse to reduce some of the long term price premiums that have been keeping oil at such elevated levels.

Perhaps the next round of Fed speeches will shed some light on what weight they give to unit labor costs. I hope they do (shed some light, that is) because that looks like the one thing that could prompt them back into the mode of raising rates at the moment. Today's news may increase the probability that another rate hike is coming at the next meeting, but I think only slightly. This does, however, reinforce my opinion that more rate hikes are coming eventually.

From China Daily, a source that I cite here occasionally and that we should all read more often.

The UN Conference on Trade and Development (UNCTAD) said on Thursday that China's renminbi revaluation should continue gradually rather than abruptly so as to maintain economic stability.

In its annual Trade and Development Report, the agency said China has played "a vital role" in helping the economic growth of other developing countries.

"Since the beginning of the 1990s, China's domestic demand and its imports have grown very strongly indeed, and the country has played a vital role in spreading and sustaining growth momentum throughout the developing world," the report said.

Such a process should not be derailed, and therefore, renminbi revaluation should continue gradually rather than abruptly, taking due account of regional implications, it noted.

Oh, and there's also this little bit...

The UNCTAD also praised China's sharp economic growth in recent years, indicating China's characteristic growth, which highlights a government role in the market, could be a model for poor countries.

The report said governments of developing countries should "take a pro-active stance in macroeconomic and industrial policies to accelerate private investment and technological upgrading and to stimulate the creative forces of markets."

The hands-off policy and total reliance on market forces, as promoted by international financial organizations and lenders in the 1980s and 1990s, has proved to be a failure for many developing nations, it said.

A new and expanded MITI? I'm not sure I like that idea. Now, of course it's no secret that I have long argued for a gradual adjustment of the RMB as opposed to a sudden revaluation. Ronald McKinnon sums up the situation well in his recent contribution to the Wall Street Journal. But while it is sensible to manage the appreciation to bring a developing (and long isolated) currency in line with the rest of the world slowly so as not to cause havoc in the quick-to-punish-slow-to-forgive financial markets, I wouldn't extend that to other matters such as industrial policy. Indeed, isn't the greater part of China's success a result of more flexible and free markets than 20 years ago? Isn't the problem in many other developing countries the fact that property rights are not assured and governments circumvent the market?

While China's gradual approach in nearly all facets of economic reform have certainly been more successful than efforts in the former Soviet Union, the important thing is that they keep moving in the right direction. The key is that the Chinese government's role in the market, while still significant, is less than it was previously and that is what unleashed the most amazing growth process our generation has seen. The message to developing countries should be to look at where China is going, not where they have been. Don't give kleptocracies another reason to strengthen their hold on their economies.

Let's draw a distinction. Managing the currency is about giving the financial markets a firm base on which to form expectations. A gradual move towards full flexibility builds confidence. Managing the processes of innovation and industrial development with a heavy hand will not win you points with foreign investors. The last paragraph I quoted above is certainly a criticism of the "Washington Consensus". But you can avoid making those mistakes without turning back the clocks on progress towards freer markets with "industrial policies". The failures of the "Consensus" were a result of many things, not the least of which was its one-size-fits-all approach. The botched implementation created the instability it tried to avoid. Just because the "Consensus" failed does not imply that the path to freer markets is impossibly blocked. Indeed a little more sensible handling of monetary and currency issues in developing markets would go a long way towards promoting the stability that is necessary to unleash the creative process in industry. UNCTAD gets it half right and half wrong.

UPDATE: This would be a good time to point out the NY Times review of Joseph Stiglitz's new book.

UPDATE 2: Tyler Cowen agrees that the U.S. should stop pushing for yuan revaluation. (NY Times)

The FRED (Federal Reserve Economic Database) is a valuable resource for economists. Many of us bloggers go there first for data. I see many journal references to it as well. I've been using it since grad school, and it keeps getting better. A few days ago I noticed a new improvement. You can now graph two time series on the same graph. You can also plot any series in logs, percentage change annualized or year-on-year and more.

Nice!

I'm working on a longer more analytical post on this. For now, you can read this: (Reuters)

WASHINGTON (Reuters) - U.S. employers added 128,000 workers to their payrolls in August, evidence of a cooler -- but still solid -- pace of economic growth that could let the Federal Reserve hold interest rates steady.

"It looks an awful lot like a soft landing, at least for now," said Dana Johnson, chief economist at Comerica Bank in Detroit. "It's an economy that is not firing on all cylinders -- it's got a clear concentration of weakness in the housing sector -- but, otherwise, an economy that is moving ahead at something resembling a trend-like pace."

The prospects for a soft landing will be the topic for a post or two next week. Are the 128,000 jobs added this month a sign that the economy is still fundamentally on track or that recession looms? More to come.