Wednesday, May 11, 2005

Economics summary

Lots of economic news today, somewhat mixed:

  • The Washington Post admits - about 4 weeks after I mentioned it- that revauluing the yuan is a mixed blessing at best:

    Some economists caution that a change in China's currency regime could boomerang on Washington. That is because under its fixed-rate system, China's central bank constantly buys billions of dollars on currency markets, which are invested in U.S. Treasury bonds and provide a major source of financing for the federal budget deficit. If the flow of money from China into the dollar and Treasury bonds were to dry up, financial turbulence might well ensue, including a sharp upward spike in interest rates.

    Questioning whether U.S. officials may ultimately regret prodding Beijing for a rising yuan, Nouriel Roubini, a professor at New York University, wrote on his Web log last month, "The first rule of good manners -- and finance as well -- is that you should not bite the hand that feeds you."

    Administration officials have studied the likely financial impact of a Chinese currency adjustment and view the problem as easily manageable. Many independent analysts agree, saying that unless Beijing lets its currency float completely freely -- an almost inconceivable step -- it would have to continue buying large amounts of dollars...

    Typically, Chinese exports -- such as DVD players, clothing and auto parts -- contain many components and raw materials that come from other countries; the value added in China often involves low-cost assembly and other labor-intensive work. In testimony at a congressional hearing last month, Douglas J. Holtz-Eakin, director of the nonpartisan Congressional Budget Offices, cited research indicating that China contributes only about 20 to 30 percent of the value of the average product that it ships abroad.

    Thus, Holtz-Eakin said, even though a rise in the yuan would increase the price of Chinese imports, "those increases would probably be much less than the appreciation of the yuan itself." For example, if the yuan rose 20 percent -- a significant appreciation -- the increase in the price of Chinese imports would probably average only about 4 to 6 percent, Holtz-Eakin said...

    Even if Chinese imports do rise in price and the United States buys fewer of them, that will not necessarily help shrink the U.S. trade deficit or save U.S. jobs, because imports from other countries may simply fill the gap left by China.

    Consider the computer and electronics industry: Imports of computers and other electronics from China have soared in the past several years, with the Chinese share of the market rising from 4.3 percent in 2000 to 11.1 percent in 2004. But as Holtz-Eakin noted in his testimony, imports' overall share of the market stayed roughly the same. The obvious implication, he said: "Imports from China were largely replacing imports from other sources."

    Nice of them to admit that bloggers know stuff before readers of the Washington Post.

  • The Financial Times points out that real wages are falling in the US, quite rapidly:

    Real wages in the US are falling at their fastest rate in 14 years, according to data surveyed by the Financial Times by the Economic Policy Institute.

    Inflation rose 3.1 per cent in the year to March but salaries climbed just 2.4 per cent, according to the Employment Cost Index. In the final three months of 2004, real wages fell by 0.9 per cent.

    The last time salaries fell this steeply was at the start of 1991, when real wages declined by 1.1 per cent.

    Again, not surprising this is what you get when Republicans are in office. Except in election years, when the Fed games the system. (Somebody tell that to Kevin Drum.)

  • United Airlines gets a green-light to default on its pension plan.

    The ruling releases United, a unit of the UAL Corporation, from $3.2 billion in pension obligations over the next five years. The federal agency that guarantees pensions, the Pension Benefit Guaranty Corporation, will assume responsibility for the plans, which cover about 134,000 people.

    Some retirees could see sharply lower pension payments as a result; others will see little change in benefits, depending on a variety of factors. Some retirees at US Airways, which has terminated its plans, have seen benefits drop by as much as 50 percent.

    The airline, which has been in bankruptcy protection since December 2002, has been pushing to end its pensions since losing its bid for a federal loan package last year. But unions representing United's employees fought the action, threatening to strike if the pensions were set aside.

    Along with raising that prospect, the action has significant implications for the airline industry, which has lost more than $30 billion since 2000, and perhaps for other industries like automobiles, with similarly heavy legacy costs.

    Analysts have predicted that if United won its case, there could be a domino effect as other airlines are forced to seek bankruptcy protection to bring their pension costs down to United's levels.

    That move would probably swamp the pension agency, which was created in 1974.

    Part of me is really scared about my own pensions, part of me is really intrigued about when to plunk some cash into United. Looks a bit early today.


  • The trade deficit fell sharply in March.

    The March improvement reflected a 1.5 percent increase in exports of U.S. goods and services, which rose to an all-time high of $102.2 billion, the fourth straight monthly record. The March improvement reflected gains in a wide range of products from commercial aircraft and telecommunications equipment to farm products and art work.

    Imports, which had hit a record high in February, fell by 2.5 percent to $157.19 billion, reflecting a big drop in imports of foreign cars and in textile and clothing imports from China. This helped to offset a 4.1 percent increase in America's foreign oil bill, which rose 4.1 percent to $18.9 billion, the second highest level on record.

    The deficit with China, which has become a growing target of attack in Congress because of its position as the country with the largest trade gap with the United States, declined by 7 percent to $7.83 billion in March. The narrowing trade gap reflected in part a 21.2 percent drop in imports of clothing and textiles in March.

    However, Chinese imports of these products are still running 54 percent higher in the first three months of this year when compared with the same period a year ago. This reflects the surge that has occurred after global import quotas were lifted on Jan. 1...

    While the deficit with China was lower last month, the deficit with Japan shot up by 14.1 percent to $7.83 billion. The deficit with Canada declined by 12.5 percent to $5.05 billion but the deficit with Mexico, the other partner in the North American Free Trade Agreement, surged by 16.1 percent to $4.26 billion. The deficit with the 25-nation European Union was up 9.9 percent to $9.31 billion.

    The administration argues that the trade deficit primarily reflects the fact that the United States has been growing at a faster rate than much of the world, boosting our demand for imports while the demand for U.S. products has lagged.

    Administration officials contend that the way to compete in a global economy is to push to eliminate barriers to sales of American manufactured goods, farm products and services such as banking around the world.

    But critics charge that these free trade deals primarily benefit U.S. corporations who are able to shut their U.S. manufacturing plants and move production to low wage countries with free trade deals and then shipment the finished goods back to the United States duty free.

I would postulate that the fall in the trade deficit might have something to do with the fact that lower wage earners are getting squeezed.

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