ECONOMIC THINKING

• Signs of Stabilization in Trade?
  Posted by Phil Izzo

  Both imports and exports have taken a severe hit since the recession accelerated in September 2007, but new data offer another indication of stabilization — at least on the import side.

  Panjiva, Inc., a U.S.-based firm that helps brands find overseas suppliers, tracks customs data and finds that the number of “significant” companies shipping goods to the U.S. have stopped declining after a big drop-off beginning in November. Panjiva defines a significant supplier as one who makes 10 or more shipments to the U.S. in a month.

  “The number of companies shipping to U.S. customers is no longer in free fall — definitely a reason for optimism,” Panjiva said.

  But the environment remains in a precarious state. Panjiva compiles a Watch List of manufacturers suffering a 50% decline in volume shipped to U.S. customers in the most recent three month period, versus the same period a year ago. In April, 31% of significant suppliers were on that list, up from 30% in March and 24% as recently as December of last year.

  Panjiva collects publicly available customs information to compile its data.

  Rethinking Conventional Wisdom About 401(k) Loans

  Posted by David Wessel

  Americans could save as much as $5 billion a year — or $275 per household — by borrowing from their 401(k) retirement accounts instead of more costly consumer loans, Federal Reserve economists Geng Li and Paul A. Smith conclude in a recent Fed working paper.

  Many households eligible for 401(k) loans “carry relatively expensive consumer debt that could be more economically financed via 401(k) borrowing… We estimate that such households could have saved as much as $5 billion in 2007 by shifting expensive consumer debt to 401(k) loans. This would translate into annual savings of about $275 per household — roughly 20 percent of their overall interest costs — with larger reductions for households that carry consumer debt at high interest rates or who hold larger 401(k) balances,” they say.

  The key advantage of a 401(k) loan is that it reduces the need for paying interest to outside lenders. Indeed, since the “borrowed” assets are already owned, a 401(k) loan is really just a withdrawal coupled with a schedule of replenishing contributions (with interest). A secondary advantage is that the transaction costs are typically quite low. Nonetheless, many financial advice publications discourage 401(k) borrowing, “Some worry that 401(k) borrowing simply encourages over-consumption, undermining retirement savings goals either indirectly (via unnecessary consumption) or directly (via reduced regular 401(k) contributions or defaulting on repayments),” they acknowledge.

  So why don’t people do this? “Risk-aversion, self-control problems, and confusion about the potential gains,” they say.

  They suggest “better financial education,” specifically posing these four questions to a would-be 401(k) borrower;

  • 1. If you did not borrow from your 401(k), would you borrow that money from some other source (e.g., credit card, auto loan, bank loan, home-equity loan, etc.)?
  • 2. Would the after-tax interest rate on the alternative (non-401(k)) loan exceed the rate of return you can reasonably expect on your 401(k) account over the loan period?
  • 3. Would you be able to make your 401(k) loan payments without reducing your regular 401(k) contributions?
  • 4. Are you comfortable with the requirement to repay any outstanding loan balance within 90 days of separating from your employer, or pay income tax and a 10% penalty on the outstanding loan?

  If a person answers yes to all four questions, then a 401(k) loan could be advantageous; otherwise, other options might be better.

  Allowing households to repay 401(k) loans gradually even after they leave their jobs “could improve household welfare by reducing the risks of 401(k) borrowing,” the Fed economists said.

  The Fed’s 2007 Survey of Consumer Finances found about 15% of eligible households had borrowed from their 401(k) accounts. The fraction has been steady since 1995, but a growing number of borrowers say they used to money to pay off other debt. Media reports suggest more families are borrowing from retirement accounts in the current recession, but the Fed data isn’t recent enough to illuminate that.

  The tax code limits the size of 401(k) loans to the lesser of $50,000 or 50% of the vested plan balance. In general, loans must be repaid within five years, though loans for the purchase (not refinance) of a principal residence may be repaid over a longer period (e.g., 15 years). Repayments are typically made via payroll deduction, but outstanding balances generally must be paid within 90 days of separation from an employer.

  Economists React: More Evidence of Weaker Consumer in GDP

  Posted by Phil Izzo

  Economists and others weigh in on the upward revision to GDP.

  • Disposable personal income was revised upward relative to the advance estimate, but the source of this upward revision is worth noting. Wage and salary income was actually marked down modestly from the advance estimate, but the estimate of current personal taxes paid was trimmed down to reflect the lower income tax withholding that is part of the government’s efforts to stimulate the economy. In terms of the prospects for income growth going forward, the effects of lower withholding will fade, but what will be ongoing job losses and declining aggregate hours worked over coming months will mean that aggregate earnings continue to decline. With labor earnings the primary support for consumer spending, this does not bode well for any meaningful rebound in consumer spending over the near term. –Richard F. Moody, Forward Capital

  

  • No major surprises in this revision, and the small ones that did occur were offsetting — slightly less consumption and slightly less inventory liquidation. Revisions do not alter the character of the quarter, which shows real spending turning up a major setback in the second half of 2008 and still one of the largest quarterly liquidation rates of the post World War II era. –Goldman Sachs
  • The surprise is the downward revision to consumption, to 1.5% from 2.2%; most of the downshift was in spending on non-durable goods… All the net revision to GDP came from inventories, down $91.4 billion compared to the initial estimate of $103.7 billion. We are baffled when we read that an inventory rebuild will support growth in second half; the aggregate inventory-to-sales ratio still exceeds its trend by more than in the recessions of 1990-1 and 2001. –Ian Shepherdson, High Frequency Economics
  • The upward revision was slightly worse than expected, likely because the new estimate for consumer spending was lower than most forecasters had anticipated. Today’s release also contained the government’s first estimate of corporate profit growth for the first quarter.. The rebound was driven by a 95% gain in profits in the financial services sector — by far the largest quarterly increase in the post-war period. Despite the sharp gain, however, financial sector profits remain down 50% from their peak. –Nomura Global Economics
  • The upward revision to GDP resulting from a somewhat smaller (but still very sizable) decline in inventories was largely as advertised and should not be viewed as news. However, the 3.4% increase in economic profits (+13.0% on an after-tax basis) is news and points to a smaller decline in GDP on an income basis than reported on an expenditure basis. It appears that corporations did a phenomenal job in cutting costs in the first quarter (particularly in reducing head count) and despite a 3.1% drop in nominal GDP (whole economy revenues), U.S. companies managed to increase profits. –RDQ Economics
  • All the incoming data suggest that the rate of decline in economic activity is decelerating… The key drivers of the gradual improvement in the outlook will be the massive monetary and fiscal stimulus (the full impact of the latter is expected to occur late this year and early next year) and a turn in the inventory cycle. Even if companies don’t accumulate inventories, but simply stop cutting, this will help growth, albeit temporarily. –Nariman Behravesh, IHS Global Insight
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  Another Milestone: U.S. Corporate Defaults to Date Match Total for All ‘08

  Posted by David Wessel

  Three more global corporate bond issuers defaulted this week, bringing the year-to-date tally to 135, more than four times the 32 defaults recorded in the same period of last year, Standard & Poor’s said.

  All three of this week’s defaulters (Berry Plastics Group Inc., Metaldyne Corp. and Visteon Corp.) were based in the U.S., bringing the tally of defaults this year to 96 issuers in the U.S, the rating agency said. That matches the number of defaults for all 12 months of 2008.

  Another 21 defaults so far this year were in emerging markets, seven in Europe and the remaining 11 in other developed countries (Australia, Canada, Japan, and New Zealand).

  “The precipitous increase in defaults reflects a pronounced decline in economic fundamentals and earnings prospects, as well as the continued credit freeze, effectively halting lending to speculative-grade borrowers,” S&P said Friday. It sees four other factors making the current environment “more conducive” to defaults: deep recession in the U.S., a record-high proportion of issuers in recent past with speculative-grade ratings, the highest volume of low-rated issuance since 2003, and the seasoning of much of the debt rated ‘B-’ or lower issued in the past several years.

  Click Continue Reading for a full list of 2009 defaults in the U.S.

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  Secondary Sources: Health-Care Accounting, Treasurys, Inflation

  Posted by Phil Izzo

  A roundup of economic news from around the Web.

  • Health-Care Accounting: The Congressional Budget Office outlined how it would account for health-care proposals on the government’s books yesterday. Former acting director Donald Marron notes the implications. “Back in the 1990s, CBO decided that President Clinton’s proposed health insurance reforms would move large portions of the health care system into the federal government … and onto the federal budget. Not surprisingly, that finding strengthened the hand of opponents who were portraying the proposal as a big government expansion.” He quotes CBO Director Douglas Elmendorf, whose statement indicates this time may be different. “In CBO’s view, the key consideration is whether a proposal would be making health insurance an essentially governmental program, tightly controlled by the federal government with little choice available to those who offer and buy health insurance — or whether the system would provide significant flexibility in terms of the types, prices, and number of private-sector sellers of insurance available to people. The former — a governmental program — belongs in the federal budget (including all premiums paid by individuals and firms to private insurers), but the latter—a largely private-sector system — does not.”
  • Treasury Dangers: Writing for his Fed Watch blog, Tim Duy suggests the Fed may taking too benign a view of the rise in Treasury yields. “I want to believe that the rapid reversal of Treasury yields is a benign, even positive, event. This is likely the Fed’s view; consequently, the will hold steady on policy. Challenging this benign view is that the reversal appears to be lock step with a return to dynamics seen in 2007 and 2008 - exceedingly low US rates encouraging Dollar outflows, stepping up the pace of foreign central bank reserve accumulation and putting upward pressure on key commodity prices. I worry that policymakers have forgotten the external dynamic that was hidden by the crisis induced flight to Dollars last fall. Indeed, capital outflows (indicated by a foreign central bank effort to reverse those flows) would signal that much work still needs to be done to curtail U.S. consumption to bring the global economy back into balance. Policymakers are unprepared for this possibility.”
  • Inflation Scare: Paul Krugman of the New York Times says inflation fears are much ado about nothing. “So if prices aren’t rising, why the inflation worries? Some claim that the Federal Reserve is printing lots of money, which must be inflationary, while others claim that budget deficits will eventually force the U.S. government to inflate away its debt. The first story is just wrong. The second could be right, but isn’t.”
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  Carrots Not Helping You Lose Weight? Try a Stick

  Posted by Phil Izzo

  Getting people to lose weight is a difficult proposition, and new research indicates even financial incentives aren’t particularly effective. Perhaps it’s time to put away the carrot and take out the stick.

  John Cawley and Joshua A. Price of Cornell University, in a paper titled “Outcomes in a Program that Offers Financial Rewards for Weight Loss,” looked at results from three groups that followed plans offered by their employer: one that got no incentives, one that was paid steady quarterly rewards and one that paid a monthly fee and received a refund based on weight loss. The modified incentives group — the participants who received the refund — could get an additional payout if they managed to lose more than 10% of their weight.

  The results weren’t particularly encouraging. “After one year, those in the modified incentives group lose 1.9 pounds more than those in the control group, while the weight loss of those in the standard incentives group is not statistically distinguishable from that of the control group.” Basically, standard payouts weren’t any more successful than nothing at all, and refunds were only slightly better.

  Maybe there is a way to build on the modest success of the refund. People tend to be more motivated if they have something to lose. But the structure of the refund might not have maximized the psychological effect of the loss. Not getting a refund doesn’t pack the same punch as having to make a lump sum payment.

  That’s one of the options offered by Web site stickK, which offers commitment contracts. The penalties can be as simple as telling your friends that you failed, but also can involve payments to a charity. Still not punishment enough? How about giving a generous donation not to your favorite charity, but one you can’t stand?

  It’s a strategy employed by President Obama’s OMB Director Peter Orszag, who uses it to motivate himself when preparing to run marathons. In an interview with the New Yorker, he explains, “If you do weight loss, if you give someone a payment for losing weight, that has an impact. But a far bigger impact is a stick for not losing the weight or not keeping it off… The evidence suggested that for the same financial incentive, if there is a penalty or carrot that’s equal, the penalty worked better.” (Check out Ryan Lizza’s post if you’re curious what Orszag’s anticharity is.)

  Success might be more substantial if dieters put the honey back in the cupboard and open up the vinegar.