MBS Blog

Retirement no joy for most because of paltry pensions

Yuliya Popova, Kyiv Post Staff Writer

An average monthlypension of $100 might be enough tosurvive on, but certainly not enough to live well on.

Although there may be gloating on the part of some Russians regarding the fate of their neighbors in Ukraine, this article from Russia Today (ww.russiatoday.com) does reflect the reality here.

As the Ukrainian government goes begging for loans around the World with the IMF holding  back on the next tranche of a promised loan, the hryvnia experiencing new lows daily, and workers being laid off throughout Ukraine, the “crisis” is certainly getting worse. The political stalemate is adding to the pain.

Workers suffer under deepening economic crisis in Ukraine

The economic crisis in Ukraine is escalating, and while the government is pointing fingers at each other, social unrest is growing as people lose their jobs or remain unpaid for months.

The crisis is most visible in the Ukrainian city of Kherson, where more than a thousand workers at a combine harvester factory have not received any wages since September.

“They were forcing us to retire. But I didn’t. Where else do we have to go? It’s the same thing everywhere,” said one disgruntled factory worker.

The average salary here is around $US 200, which is barely enough to make ends meet as prices in Ukraine are growing rapidly.

Aleksandra Tkachenko works at the factory and says that she lives in the fear that tomorrow she’ll have nothing left to be able to feed her family. Her entire family now lives off the pension of Aleksandra’s husband, which is less than $US 100 a month.

Recently, her husband suffered a brain hemorrhage and the strain is taking its toll.

“You can’t imagine what a life we life. I’ve spent half of the pension on medicine for my husband, but that won’t even last till the end of the month,” says Tkachenko.

The owners of the factory say they can’t pay the salaries because the combine harvesters are not being sold. The situation in Kherson is one of the first explosions of public rage in Ukraine over the current economic crisis. Experts claim work at almost all factories and mines in the country is either suspended or under threat.
 
By spring, unemployment is expected to grow by four times, topping almost four million people. The public outcry to the consequences of the economic crisis that is gripping Ukraine is getting louder, as more workers put down their tools to protest. 

Unemployment in Ukraine is soon expected to hit levels not seen since the fall of the Soviet Union. Public opinion indicates that what people want is for the government to stop the infighting and to give them the helping hand they desperately need. The crisis of trust among the country’s political elite isn’t helping the situation either.

The president and the opposition blame the government of Yulia Timoshenko for failing to tackle the crisis, or find the right ways to spend the billions of dollars loaned from the International Monetary fund.

Timoshenko says the government needs more money and fewer obstacles from both the parliament and the president. Her latest move – a request for more loans, including five billion dollars from Russia – has yet again provoked the wrath of the president.

“President Yushchenko says the step undertaken by the government without his knowledge is unacceptable and has obvious signs of corruption,” says Irina Vannikova from the Ukrainian Presidential Administration.

With the president and his government failing to agree upon ways out of the crisis, the country plunges ever deeper into a recession, leaving millions of people without work, and in the fear that they will soon have nothing to put on the table.

Here is the weekend update from MBS staff…and an article from www.businessneweurope.eu

While we agree with much of Ben here, we note the wide disparity not only between Ukrainian Government projections-which are optimistic to say the least-but also among the various firms tracking the Ukrainian economy.

We find it ironic that Ukraine’s economy is considered more diverse than many other economics, yet the emphasis is still on steel prices. The consensus would be that it is the lynchpin of the Ukrainian economy.

The one thing we believe will happen are more privatizations. We also don’t think the Ukrainian Government projection of a 7.30 hryvnia to the U.S. dollar as the average rate for 2009 is realistic. We believe the hryvnia will depreciate further in 2009. That could however, accelerate reforms. However, Ukraine will have to endure economic pain during that transition period. 

UKRAINE 2009: tough times ahead

Ben Aris in Berlin  December 20, 2008                Ukraine will have a harder time of it in 2009 than any other country in the region. It enters the year in recession and the prospects for growth in the second half of the year depend heavily on what happens to the global economy.  In general, the economy remains more resistant to external shocks, as it is relatively well diversified by Eastern European standards and the large consumer base helps. However, public finances are in mess and monetary policy is weak. The banking system was also teetering on the brink of collapse in late 2008 when the National Bank of Ukraine had to resort to administrative measures to prevent bank runs and a total meltdown.  The crisis was feeding through into the retail sector by the end of 2008 as retail turnover fell by 1.1% in November after growing by 16% the month before, bringing a consumer boom that has been running for years to an end.  An emergency $16.5bn loan from the International Monetary Fund (IMF), of which $4.5bn was already disbursed before the end of 2008, saved Ukraine’s bacon during the worst of the instability.  Still, the outlook for the second half of 2009 is rosier and Ukraine has made a lot of progress in recent years. “By many measures, Ukraine is currently much more immune to cyclical shocks: foreign exchange reserves have increased substantially, foreign capital increased its share on the local financial market (which is now well capitalized and profitable), the fiscal system has a strong budget code (with defined roles and responsibilities in the budget process) and the [World Trade Organisation] has liberalized external trade,” Maryan Zablotskyy, macroeconomist at Erste Bank Ukraine, points out.  Ukraine’s economic policy is weak both fiscal and monetary wise. On the one hand, the state budget has had a good balancing influence on fiscal policy - since 2000, the average budget deficit has stood at just 0.75% of GDP. However, budget planning was only conducted for one year, which meant that the government has tended to increase spending in nominal terms during times when steel prices and growth were increasing and this tends to amplify the economic cycle and the impact of steel price volatility on the economy. Consequently, the sudden plummeting of steel prices in the current crisis caught the government off guard.  ECONOMIC FORECAST  Ukraine will see the sharpest slowdown of all the countries in Eastern Europe in 2009. The cabinet released its macroeconomic forecast for 2009, projecting real GDP growth of just 0.4% on year. These numbers are based on the Economy Ministry’s optimistic scenario and assume an improvement in foreign demand and effectiveness of the government’s anti-crisis measures. Earlier, the ministry announced an estimated 5% GDP decline based on the pessimistic scenario, which the ministry has not released.  Dragon has a bit more pessimistic scenario, with GDP declining by either 0.7% in case of a fast global recovery, or by 4%, in a more pessimistic case. Fitch forecasts a contraction in Ukraine’s real GDP in 2009 by 3.5%. Erste analysts project a recession of 2.5% of GDP in 2009, with economic growth returning only in the second half of 2009.  “Despite clearly having very strong international support, it will take some time to sort out the imbalances. Still, as the political sphere is now united by a foreign anchor (International Monetary Fund loan), we believe that there is a good chance that Ukraine might finally start implementing the reforms that it did not do for 10 years,” says UBS.  If it does, the medium term looks good: “GDP growth will return to its potential growth of 5-6% in 2010, while inflation is likely to come down to a single-digit figure,” conclude Erste analysts.  Ukraine had the highest rate of inflation in Europe in 2008, but the crisis was a blessing in that it at least helped slow to 22.3% in November the galloping price rises. “We consider the government’s one-digit inflation forecast much less realistic as the hryvnia’s sharp depreciation will put significant pressure on domestic prices. We currently expect inflation in Ukraine to rise by 14.2% on year (base case) or 16.9% on year (pessimistic case) in 2009,” says Dragon  inflation forecasts  Government 9.5%  Dragon 14.2% (base) - 16.9% (pessimistic)  Fitch 17.5%  Foyil Securities 14.5%  DEVALUATION  Ukraine is vulnerable to external shocks to its currency as nearly 50% of total lending in Ukraine is in foreign currency. After spending more than $7.5bn – 20% of its reserves – to support the hryvnia in October and November, the NBU lowered both its official rate repeatedly, and its interbank intervention rate to finally unify them both at the IMF’s behest.  The hryvnia lost nearly 60% of its value from its high in May 2008 of UAH4.5/USD as a result of the crisis. By the end of December the currency had probably oversold and was trading at UAH8.2/USD, at which point the government said it would stabilize.  The optimal level of the UAH/USD will depend on steel prices and Erste analysts project the optimum level to be around UAH7 per dollar, which suggests the currency has overshot at UAH8/USD. However, ultimately the value of the currency will depend on where steel prices settle.  In order to remove some of this unpredictability from the public finances, one of the strings the IMF has attached to its loan is the government must set up a UAH40bn stabilisation fund that can be used to issue stabilisation loans and bail out banks. The fund will be maintained in the future partly from privatisation receipts and the whole privatisation programme has been put back on the agenda for 2009.  The average exchange rate in 2009 will be UAH7.30/USD, according to the government. However, the currency will be affected by Ukraine’s unpaid gas debts to Russia and the price it has to pay for gas imports.  However, the really big change is the current crisis has effectively smashed the foreign currency trading band inside which the NBU has kept the hryvnia more or less constant at about UAH5/USD for most of the last five years.  CURRENT ACCOUNT DEFICIT  The government is hoping to reduce the current account deficit in 2009 as a result of the devaluation. “I hope that a fall in fuel prices, a very moderate rise in gas prices and the exchange rate will bring a zero or a deficit of the current account at 1-2% [of GDP],” Deputy Governor of the National Bank of Ukraine Oleksandr Savchenko said in December.  Fitch estimates the current account deficit will rise to $4.5bn, while the total foreign debt that needs to be paid in 2009 is $45.6bn, equivalent to 157% of Ukraine’s international hard currency reserves. Andrew Colquhoun, the director of sovereigns group at Fitch Ratings, said that clearly Ukraine will not be able to meet these payments unless it can raise some external financing.  With steel exports falling and the compensatory inflow of foreign direct investment (FDI) also slowing, balancing the current account has become a major challenge going forward. FDI in Ukraine in 2008 is projected at $8bn-9bn and in 2009 at over $5bn, said the NBU’s Oleksandr Savchenko.  BANKS  Ukraine’s fast growing bank sector came close to collapse and the rescue measures are likely to have far reaching consequences on the whole sector.  “The government received the right to borrow money in foreign currency on the local market and use government bonds to buy troubled banks [as part of its new crisis powers]. These, alongside the increase in the state fund guarantee for deposits from UAH50,000 to UAH150,000 (covering 99% of individual accounts) and the increase in refinancing activities by the NBU are meant to secure overall banking system stability, which is likely to go through a period of large-scale evolutionary changes,” say analysts at Erste. “The IMF and Ukraine have effectively agreed on driving further consolidation in the banking sector. Even with minimum capital requirements twice those in Europe, Ukraine has some 170 banks, a number that could fall by as much as 30% in 2009 and 2010.”  An attempt to rescue the troubled Prominvestbank seems to have failed and is likely to be nationalised. The whole sector should enter a period of consolidation running into 2009.  EQUITY  After equity prices rose 136% in 2007, the Ukrainian equity market lost nearly 80% in 2008, wiping out all the gains for the last several years in the process. By the start of 2009, Ukraine was one of the cheapest markets in the world in terms of P/E ratios. Only Russia is cheaper.  “Ukraine’s premiums over Russia are justified in our view, as the Ukrainian economy is to a large extent hedged against decreasing commodity prices,” explain analysts at Galt & Taggart. “The country is a large net importer of hydrocarbons, which impact directly on production costs for energy-intensive Ukrainian industries. We believe any potential natural gas price hike in 2009 is more likely to be symbolic. Despite Gazprom’s fear-mongering rhetoric, reference prices are falling and Ukraine holds the transit and storage keys to the bulk of Russian gas exports to Europe. In addition, a bottom-up inspection offers a number of national champions like Enakievo Steel and Ukrsotsbank, among others, which have some of the lowest valuations in their Eastern European peer groups.”  But comparisons to Russia are of limited value due to the vast difference in the size of the markets. Daily trading volumes on the Russian markets are in the billions of dollars whereas in Ukraine the volumes have crashed from between $30m-60m down to about $1m a day as of the end of 2008. Such tiny liquidity makes prices extremely susceptible to shocks.  “Given the liquidity and volatility issues are likely to plague the Ukrainian market until the world finds answers to the financial upheaval, we recommend investors look at shares traded abroad, namely London and Warsaw. Liquidity on those markets remains better than on the local market due to stricter disclosure requirements, better market infrastructure and the presence of ‘quality’ long-term investors. For all intents and purposes, the Ukrainian agricultural sector is represented only on foreign bourses and we see the sector as a solid performer in uncertain times,” says G&T.

Technorati Tags: MBS Ltd., fiscal policy, commodity prices, Galt & Taggart, natural gas prices, Gazprom, Romania, Hungary, Poland, equity, P/E ratios, Prominvestbank, Oleksandr Savchenko, bank sector, Andrew Colquhoun, Fitch Ratings, foreign direct investment, FDI, current account deficit, foreign debt, Russia, NBU, inflation, domestic prices, slowdown, recession, economic growth, monetary policy, budget planning, Maryan Zablotskyy, economic cycle, GDP, steel prices, external trade, World Trade Organization, Erste Bank Ukraine, foreign exchange reserves, International Monetary Fund, IMF, instability, East Europe, National Bank of Ukraine, Anton Olff, retail sector, reforms, hryvnia, U.S. dollar, depreciation, privatiziations, www.businessneweurope.eu, Ukraine, economy,

If only I had the crystal ball the World Bank seems to have for telling us the obvious. Once again, the Financial Times (www.ft.com) delivers the timely news to those of us watching and waiting to decide where to put our hard earned kopecks.

Looks like commodities will not be the ticket to riches that I had supposed….if I follow the World Bank.  Of course, this won’t be good news for our Russian friends, but I wouldn’t sell the Bentley just yet. I have a feeling that some of Wall Street gurus like Jim Rogers…who lives in Asia now…may be right about this being a dip before commodities resume their rise to the sky. Just think of all those governments and central banks…including mine in the United States…that will need to inflate to pay for all that stimulus, debt, bailouts and universal health care. 

The bottom line is that commodities-like equities and real estate- experienced a boom due to real demand as well as unreal interest rates, cheap money, and lots of speculation. The flip side is that hard assets will make a comeback-though maybe not to the stratosphere-but will post solid gains in the inflationary environment that we could see within the next several years.

Global demand for oil to plummet

By Javier Blas in London and Krishna Guha in Washington

Published: December 9 2008 20:09 | Last updated: December 9 2008 20:09

Global oil demand will collapse next year and commodities will not return to the highs they reached this summer in the foreseeable future, two authoritative reports said on Tuesday as they forecast a long and painful worldwide recession.

The stark conclusions came as the World Bank’s chief economist predicted that the world faced “the worst recession since the Great Depression”.

The US energy department said global oil demand will fall this year and next, marking the first two consecutive years’ decline in 30 years.

“The increasing likelihood of a prolonged global economic downturn continues to dominate market perceptions, putting downward pressure on oil prices,” it said, forecasting that demand would drop 50,000 barrels a day this year and a hefty 450,000 b/d in 2009. US oil demand will drop next year to the lowest level in 11 years.

Meanwhile, the World Bank’s Global Economic Prospects report said the commodities boom of the past five years – which drove up prices 130 per cent – had “come to an end”.

The World Bank’s analysis of the commodities boom contrasts with the prevalent view among natural resources companies – and most Wall Street analysts – that the ongoing price drop is a correction within an upward trend.

Although it ruled out a return to the torrid high prices of this summer, it said commodities prices would not fall back to the depressed levels of the 1990s.

Oil would return to about $75 a barrel within the next three years, it said, while food would trade 60 per cent higher than in 2003, but about half below this year’s record.

“Over the longer run, the price of extracted commodities should fall,” the bank said, adding that because of slower population and income growth, world demand for raw materials will ease.

Andrew Burns, the leading author of the report, dismissed the idea – widely supported among the industry and international bodies such as the International Energy Agency – that the credit crunch could result in higher prices when the economy recovers as companies cancel supply expansion projects.

The bank forecast that world trade – an engine of growth for many developing countries – would contract for the first time since 1982.

Justin Lin, the World Bank’s chief economist, said the current downturn was likely to see simultaneous recessions in most of the industrialised world, and that these recessions were likely to last longer than in the early 1980s, and the decline in growth would be more universal than in past episodes in recent decades.

Technorati Tags: World Bank, Anton Olff, Justin Lin, Andrew Burns, International Energy Agency, credit crunch, recession, the Great Depression, U.S. Energy Department, cheap money, interest rates, speculation, inflation, hard assets, Financial Times, central banks, global demand, Javier Blas, Krishna Guha, London, Washington, , debt, stimulus, bailouts, universal health care, www.ft.com, commodities, Bentley, Russia, Jim Rogers, Wall Street,

Contrary to the recessionary trend in the general decline of overall advertising spend, some venues will see an increase. This is particularly true of internet advertising. It reflects the evolution of media enabled by technology, and the ability of companies to precisely target (sounding very military here!!) specific markets efficiently. The bottom line is more advertising bang (effect) for the buck (dollars spent).

The recent news regarding the imminent “death” of the so-called old media outlets such as newspapers, is just the beginning of the story. Next up in the creative destruction process could be other forms of print media, and perhaps television in its current form.

The internet is replacing other forms of media by absorbing, restructuring and repackaging them. Technological innovations…such as the Apple iPhone and other data phones…are allowing the media to be disseminated to a wider audience in a more direct manner. This has opened up new forms of advertising placement which are seeing a shift,  as the article from the Russian Daily,  www.kommersant.com indicates:

Ad Market to Dip in 2009

Demand for advertising will fall 11 percent in 2009, predicts Group M, based on events on November, when all ad deals for next year were placed on hold. According to Group M, the media division of WPP, the world’s largest communications holding, Russian advertisers will cut back their activities in all media except Internet contextual advertising. While total expenditures on advertising in Russia rose 18 percent to 275 billion rubles in 2008, it will fall in 2009 to 244 billion rubles. Group M will publish its report on the coming market within the next few days. 

Projections for Russia are based on countries such as Kazakhstan and Thailand, where the economic crisis began a year or more ago, explained Konstantin Vashentsev, research director for the Maxus agency, part of Group M. He said print and outdoor advertising would be the first to feel the brunt of the crisis. In Thailand, newspapers lost 11 percent of their ad income, and magazines 12 percent, the agency says. Outdoor advertising agencies in Kazakhstan have been forced to lower their prices 30-40 percent. 

The most impressive statistics on the ad market are in the Internet. In spite of Group M expectations of 10-percent growth this year, advertising has increased 55 percent in the first nine months to 4.4-4.5 billion rubles. Outdoor ad operators experienced a 14-percent rise in income, to 33.8-34 billion rubles, in the first three quarters of the year. Russia’s largest television advertiser Video International is also optimistic. It announced yesterday that it had reached an agreement with Reckitt Benckiser, owner of the Calgon, Cillit and Vanish brands and one of Russia’s top ten advertisers (with a budget of over $58.5 million in 2007), for 2009 ad placement.

Technorati Tags: recession, advertising, Video International, Reckitt Benckiser, Calgon, Cillit, Vanish, Kazakhstan, Thailand, Konstantin Vashentsev, Maxus, Ad market, Group M, WPP, Apple iPhone, data phones, Anton Olff, Russian Daily, www.kommersant.com, print media, television, internet, creative destruction process, media, technology, old media, newspapers,

One of the side effects of the Global Economic Crisis-and we have to come up with a new name for this “crisis,” is the steep falloff in the amount of money sent home by immigrants and workers abroad. Many emerging market economies depend on this income to sustain themselves. The fallout from the falloff could be huge…..

Technorati Tags: Global Economic Crisis, State Real Property Cadastre, Bishkek, Chisnau, Kyrgyz Republic, Akylbek Japarov, Armenia, Matthias Luke, Kiel Institute, Kazakhstan, Uzbekistan, construction, Russian government, Anton Olff, external finance, Russia, United States, Western Europe, Dushanbe, World Bank, IMF, Shigeo Katsu, Tajikistan, Moldova, NGO, CIS countries, recession, Clare Nuttall, Almaty, Organization for Economic Co-Operation and Development (OECD), remittance payments, emerging markets,

The global economic slowdown has not slowed the consumption of fast food. On the contrary, the one thing to count on is the continuation in the growth of inexpensive fast food in emerging markets like Russia and Ukraine.

Fast food-whether it is purchased at a kiosk or market- is generally priced competitively… and is viewed as an affordable luxury, especially during lean times. It is also viewed as the type of consumable that brings a degree of  “comfort,” similar to tobacco, coffee and alcohol.

As the video below  from the Russian News & Information Agency (NOVISTI) at www.en.rian.ru/ the perceived unhealthiness of this type of food is not high on the list of Muscovites……

Technorati Tags: comfort, emerging markets, fast food, global economic slowdown, lean times, luxury, recession, Russia, Ukraine, tobacco, coffee, alcohol, Russian News & Information Agency, NOVISTI, www.en.rian.ru, Anton Olff, unhealthy, Moscow, Muscovite

We are in a recession…so what are we going to do about it? As individuals and organizations we have to improvise, adjust and overcome.  The “capitalist tools” over at www.forbes.com know what businesses need to do.

Many companies are thinking: cut expenses to the bone, particularly advertising and marketing expenses. Well…as I mentioned in last week in Recessionary Marketing (http://www.medblacksea.com/blog/2008/11/recessionary-marketing/ )  the best strategy might be to employ some “contrarian” tactics:

Don’t Skimp On Ad Budgets

Knowledge@Wharton, 12.01.08, 05:30 PM EST

Cutting advertising expenses can yield short-term gains–and long-term trouble.

With corporate managers under enormous pressure to control costs and maintain liquidity in the current credit crisis, advertising budgets often appear to be a dispensable luxury in the struggle to survive. Executives who succumb to that temptation, however, put the long-term future of their companies at risk, according to Wharton faculty and advertising experts.

“The first reaction is to cut, cut, cut, and advertising is one of the first things to go,” says Wharton marketing professor Peter Fader, adding that as companies slash advertising in a downturn, they leave empty space in consumers’ minds for aggressive marketers to make strong inroads. Today’s economy “provides an unusual opportunity to differentiate yourself and stand out from the crowd,” says Fader, “but it takes a lot of courage and convincing to get senior management on board with that.”

According to Wharton marketing professor Leonard Lodish, with demand slack for advertising services, the cost of these services goes down, making advertising expenditures all the more defensible in a bad business climate. “If your company has something to say that is relevant in this environment, it’s going to be more efficient to say it now than to say it in better times,” says Lodish.

Research shows that companies that consistently advertise even during recessions perform better in the long run. A McGraw-Hill Research study looking at 600 companies from 1980 to 1985 found that those businesses that chose to maintain or raise their level of advertising expenditures during the 1981 and 1982 recession had significantly higher sales after the economy recovered. Specifically, companies that advertised aggressively during the recession had sales 256% higher than those that did not continue to advertise.

For companies that do stay the course and continue to advertise into a recession or increase their promotional activities, the key is to craft messages that reflect the times and describe how their product or service benefits the consumer. For example, companies might be tempted to emphasize price in a recession, but that only works for companies like Costco(nasdaq: COST - news - people ) and Wal-Mart (nyse: WMT -news - people ) that are built around a core strategy of providing low prices year after year, says Lodish. He points to the current Wal-Mart campaign, “Save Money. Live Better,” as a successful approach to the recession.

Dean Jarrett, senior vice president of marketing at The Martin Agency in Richmond, Va., which developed the Wal-Mart ads, acknowledges the campaign began in 2007 before it was clear a harsh recession was building. “We can’t claim we knew a recession was coming, but ‘Save Money. Live Better’ is dead on-point with who they are and what they want to be.”

Eileen Campbell, chief executive of the Millward Brown Group advertising firm in New York City, says that while companies should probably not dwell on the recession and scare consumers into hoarding their pennies under a mattress, certain products require a straight-up approach–such as financial services. “If you are in the financial services category, to behave as you did a year ago is silly.” At the same time, however, many consumers are weary of negativity generated by the recession and would be receptive to a more upbeat message, she adds. “If you can put a positive spin on how you can genuinely help without invoking doom and gloom, I think that’s going to be more compelling

Technorati Tags: recession, capitalist tools, doom and gloom, financial services, Dean Jarrett, The Martin Agency, Eileen Campbell, Millward Brown Group, New York City, www.forbes.com, advertising, marketing, www.medblacksea.com, recessionary marketing, marketing expenses, liquidity, credit crisis, advertising budgets, The Wharton School, Peter Fader, Leonard Lodish, McGraw-Hill, Anton Olff, Costco, Wal-Mart,

The “dismal scientists” are at it again.  The National Bureau of Economic Research (NBER) recently released a statement saying that the United States is in the midst of a recession that begun one year ago.

Now, it doesn’t take a rocket scientist or even an economist reading tea leaves to tell us what is obvious to most people-the World, not just the USA, is in deep economic trouble. The question remains: how do we…the collective we…define economic conditions?

For most of us, recessions and depressions are measured from a personal perspective. Recession is when someone you know loses their job or your business has slowed down. Depression is when YOU lose YOUR job or your business has gone bankrupt. This is a very simple, transparent and easily definable standard for economic cycles.

Of course, anecdotal  forms for measuring national or global economic cycles would never be considered “scientific,” accurate or informative beyond the personal. They do however point to something the article from www.americanthinker.com illustrates:

·         What are the standards for measuring economic cycles?

·         What specific data and formulas are used?

·         Are there personal or political factors that affect the determination?

·         Are the standards applied equally?

As economist Randall Hoven indicates, the NBER may not have adhered to a strict scientific analysis. So…whom do we trust? Perhaps the personal definition of economic cycles is the one we should utilize after all…….

December 03, 2008

NBER’s Anomalous Recession Calls

By Randall Hoven

The National Bureau of Economic Research, the official caller of recessions, recently said we are now in a recession that started one year ago, in December 2007 .

The committee determined that a peak in economic activity occurred in the U.S. economy in December 2007. The peak marks the end of the expansion that began in November 2001 and the beginning of a recession. The expansion lasted 73 months; the previous expansion of the 1990s lasted 120 months.

This struck me as odd.  Not that I don’t believe we are in a recession now, but the starting date of December 2007 just seemed too early to me.  To see if this made sense, I looked at some underlying economic data and the NBER’s explanation, such as it is.  Why this might be important, I’ll explain later.

The rule of thumb for defining a recession is two consecutive quarters of negative real growth in GDP.  This is now the second recession called by the NBER in the two terms of President George W. Bush, yet in neither case were there two such consecutive quarters.  In fact, at no time in Bush’s Presidency were there two such quarters.

Of all 11 NBER-called recessions since 1947, only one other involved no two consecutive quarters of negative real growth.  That was the recession of April 1960 to February 1961.  However, that recession involved one quarter with significant negative growth, -5.1% annualized, and a cumulative -1.0% growth for a whole year

Compare that to Bush’s two “recessions.”  In 2001

• No two consecutive quarters of negative growth.
• Worst single quarter: -1.4% annualized.
• Year-to-year: +0.2% (positive real growth, 4Q2000 to 4Q2001).

In 2007

• No two consecutive quarters of negative growth.
• Last four quarters: -0.2%, +0.9%, +2.8%, -0.5%.
• Year-to-year: +0.7% (positive real growth, 3Q2007 to 3Q2008).

In all the other nine recessions since 1947, the NBER-called recession involved at least one quarter of year-over-year negative real growth.

President Bush deserves some sort of prize for getting two recessions assigned to him, yet never presiding over either (1) two consecutive quarters of negative real growth, or (2) year-over-year negative real growth.  I think that’s a first.  It certainly is in the last 60 years.

But the NBER does not use the “rule of thumb.”  Here is how the NBER explains its method.

The committee’s procedure for identifying turning points differs from the two-quarter rule in a number of ways. First, we do not identify economic activity solely with real GDP, but use a range of indicators. Second, we place considerable emphasis on monthly indicators in arriving at a monthly chronology. Third, we consider the depth of the decline in economic activity. Recall that our definition includes the phrase, “a significant decline in activity.”  Fourth, in examining the behavior of domestic production, we consider not only the conventional product-side GDP estimates, but also the conceptually equivalent income-side GDI estimates.  The differences between these two sets of estimates were particularly evident in 2007 and 2008.

Get it?  I don’t.  I mean I sort of understand it, but I could never duplicate the NBER’s results with that explanation.  No one could.  It lacks transparency.  If the NBER explains its method elsewhere, I could not find it and no such link was provided in its FAQ on the matter.

For example, in the 2001 “recession”, why does the NBER say it started in March, under Bush, and not in 2000, under Clinton?  The first quarter of negative real growth was actually the third quarter of 2000, under President Clinton.  It showed -0.5% growth contraction, annualized.  But the NBER said no recession.  When it again showed -0.5% growth six months later, under Bush, the NBER said recession.

In 2007, the final revision of the estimate of fourth quarter growth was slightly negative: -0.2%.  The NBER now says that was a recession.  One quarter of -0.5% under Clinton, not a recession.  One quarter of -0.2% under Bush, a recession.

Maybe unemployment was more of a factor in the NBER’s analysis.

When the NBER said the recession of 2001 started, the unemployment rate was 4.3%.  That’s pretty low.  In fact, the unemployment rate was 4.3% or higher in every single month of President Clinton’s first term, and every single month of his second term until March of 1999.  No recession that whole time.

What about in December 2007, the beginning of our current “recession”?  The unemployment rate was 5.0%.  Then it dropped below that for the next two months and still stood at 5.0% in April of 2008.  Again, the unemployment rate was at or above 5.0% in every single month of Clinton’s recession-free first term.  It did not go below 5.0% until May of 1997.

Well, neither real GDP nor the unemployment rate quite explains the NBER’s method.  The NBER said it looks at the “income side.”  So let’s try Disposable Personal Income in real dollars.

In three of the last four months of 2000, all under President Clinton, real DPI declined.  NBER said no recession.  In the next three months, or the first three months of 2001 and mostly under President Bush, real DPI increased in each month.  NBER said recession.  Decline in three of four months, no recession.  Increase in three of three months, recession.

Just for fun, I looked at quarterly GDP numbers since 1947 and all 11 NBER recessions called since that year.  Here are a couple of interesting observations.

(1) Every time there was at least one quarter of year-to-year negative real GDP growth, there was a recession associated with it.  There were no recessions without such negative year-to-year growth, with two exceptions.

(2) With simple rules based on real GDP numbers alone, a recession as well as its beginning and ending quarters could be called.  Every recession called by these rules was also called by the NBER.  Every recession called by the NBER was also called by these rules, with two exceptions.  For every recession these rules called that matched the NBER recessions (9 of the 11), the starting and ending quarters matched within one quarter, at worst.  What were these simple rules?

• A recession starts in a given quarter when that quarter-to-next-quarter’s growth is negative and the total growth over the two quarters combined is also negative.  (A somewhat weaker version of the “two quarters” rule.)
• A recession ends as many quarters after that beginning quarter as there remains cumulative negative growth.

That is, without trying really hard, using real GDP data easily available from the St. Louis Fed only, and programming simple rules in a spreadsheet, I was able to match 9 of the 11 NBER-called recessions, with no false alarms and with, at most, one quarter mis-match in timing.  The only two exceptions in any of this?  The two recessions under George W. Bush.

My simple rules said no recession in either case (yet called all other recessions, with no false alarms).

The year-to-year negative growth rule said no recession in either case (yet called all other recessions, with no false alarms).

The “two quarters” in a row rule said no recession in either case (yet called all but one other recession, with no false alarms).

(It’s still possible, by any of these rules, that we are in a recession now, but one that started in the third quarter of 2008, meaning July at the earliest.  But for any of these rules to kick into effect, we need the fourth quarter’s data.)

I’m sure the NBER has good reasons for calling and timing the two Bush recessions. But even it would have to admit that those two recessions are anomalous — oddballs among the 11 recessions in the last 60 years.

Why would this matter?  Why would it matter whether the US recession started in December of 2007 or July of 2008, for example?  After all, President Bush presided in either case.

Here is why.  Europe is now in recession, and it started in the second quarter measured the old-fashioned way: two consecutive quarters of negative real growth in 2008.  The US did not have its first quarter of negative growth until the third quarter of 2008.  The question is whether the recession spread from Europe to the US or vice versa.

If the US recession started in 2007, as the NBER states, Europe caught our cold.  If we go by the simple rule of two negative quarters in a row, we are catching Europe’s cold.  It’s all about who gets the blame, at least plausibly so.

In 2001, President Bush got the blame instead of President Clinton, per the NBER.

In both cases, blame Bush.  In this second case, blame Bush not only for a US recession, but a global recession.  If Iceland is bankrupt, it must be Bush’s fault.

Yet in both cases, we don’t know exactly how the NBER did it.

Here is what the NBER says about itself:

Committee members are: Robert Hall, Stanford University (chair); Martin Feldstein, Harvard University and NBER President Emeritus; Jeffrey Frankel, Harvard University; Robert Gordon, Northwestern University; James Poterba, MIT and NBER President; David Romer, University of California, Berkeley; and Victor Zarnowitz, the Conference Board. Christina Romer of the University of California, Berkeley, resigned from the committee on November 25, 2008, and did not participate in its deliberations of November 28.

Christina Romer (formerly on the committee) was just designated as the chair of Barack Obama’s economic advisors.  She is married to David Romer (on the committee).

Here’s how the NBER might help: tell us exactly the formula for calling and timing a recession and give us the input data so that we can reproduce its results.  If it can’t, or won’t, it should not be considered the “official” caller of recessions in my opinion.

In my opinion, there should be both transparency and clear objectivity in calling and timing recessions.  The method should be repeatable and based on publicly available data.  It should be more than simply the considered, consensus opinion of a panel of seven experts.  Otherwise we invite public doubt — public doubt in the area of cause and effect of economic downturns.  This is important stuff — or should be, in a democracy.

Data sources:

• St. Louis Federal Reserve Economic Data (http://research.stlouisfed.org/fred2/) for real GDP (GDPC96), real Disposable Personal Income (DSPIC96) and Civilian Unemployment Rate (UNRATE).
• NBER (http://wwwdev.nber.org/cycles/dec2008.html) for latest recession announcement, FAQs on recession definition, and official recession dates (http://www.nber.org/cycles.html).

Anton Olff

Technorati Tags: dismal scientists, Europe, GDP, Federal Reserve, Disposable Personal Income, unemployment, economic activity, Bill Clinton, George W. Bush, Civilian Unemployment Rate, Randall Hoven, americanthinker.com, Depression, business cycle, National Bureau of Economic Research, NBER, recession, rocket scientist, economist, the World, United States,

As goes China…so goes the World?  Looks like a bumpier ride than expected, for emerging markets. The United Nations is also riding the wave of pessimism, going even lower than the International Monetary Fund in its forecast of global growth.

Ukrainian steel exports could increase as prices in local currency are now very competitive. Profit margins will remain constrained however. 

From www.bloomberg.com:

China’s November Manufacturing Contracts by Record

By Nipa Piboontanasawat

Dec. 1 (Bloomberg) — China’s manufacturing shrank by the most on record and export orders plunged, adding to evidence that recessions in the U.S., Europe and Japan are dragging down the world’s fastest-growing major economy.

The Purchasing Managers’ Index fell to a seasonally adjusted 38.8 in November from 44.6 in October, the China Federation of Logistics and Purchasing said today in an e- mailed statement. A second PMI, released by CLSA Asia-Pacific Markets, also showed a record contraction.

Export orders, output and new orders all shrank by the most since the surveys began as the global financial crisis sapped demand for the nation’s toys, textiles and computers. The CSI 300 Index of stocks has fallen 69 percent from a record in October last year and President Hu Jintao describes the economic situation as a test of the Communist Party’s ability to govern.

“Another grim month for China manufacturing,” said Eric Fishwick, head of economic research at CLSA in Singapore. “Export orders will weaken further and we expect further cuts in production and employment.”

The yuan fell 0.3 percent to 6.8549 against the dollar as of 11:15 a.m. in Shanghai, the biggest decline since Oct. 10, as the government sought to help exporters.

The government-backed PMI started in 2005, the CLSA study in 2004.

Deepening Slowdown

China’s economy, the world’s fourth largest, expanded 9 percent in the third quarter from a year earlier, the slowest pace since 2003. This quarter, growth may cool to 4 percent, according to JPMorgan Chase & Co.

China is very exposed to the global crisis, President Hu said Nov. 29.

An export order index dropped to 29 in November from 41.4 in October, the government-backed survey showed. A reading above 50 reflects an expansion, below 50 a contraction.

The output index fell to 35.5 from 44.3, while the index of new orders dropped to 32.3 from 41.7.

The government last month announced a $586 billion stimulus package and the biggest interest-rate cut in 11 years to revive the economy and counter the risk of spiraling unemployment and social unrest.

Toy Company Riot

Fired workers seeking more compensation from a toy factory in Guangdong province clashed violently with police on Nov. 25.

“It’s a very challenging time for policy makers — they definitely need to do more in terms of fiscal and monetary stimulus,” said Wang Qian, an economist at JPMorgan Chase & Co. in Hong Kong. “There will be more aggressive interest-rate cuts.”

A slump in property sales and building work is also undermining growth. Construction of homes, offices and factories contracted at least 16.6 percent in October after a 32.5 percent expansion a year earlier, according to Macquarie Securities Ltd.

Baosteel Group Corp., China’s biggest steelmaker, is facing its “most difficult” period since the company was founded 30 years ago as output, sales and profit plunge, an executive said last month.

“The slowdown of the Chinese economy is getting worse,” Zhang Liqun, a senior research fellow at the State Council’s Development Research Center, said in a statement today. Government efforts to revive growth “still need some time to show their full effect, which will be after spring 2009,” Zhang said.

The World Bank slashed last week its growth forecast for China to 7.5 percent in 2009 from a 9.2 percent estimate in June. That would be the weakest pace since 1990.

The government-backed Purchasing Managers’ Index is based on a survey of more than 700 companies in 20 industries, including energy, metallurgy, textile, automobile and electronics.

The survey tracks changes in output, new orders, employment, inventories and prices.

Anton Olff