US dollar now upside down vs Canadian dollar

Take a look at these two charts borrowed from Yahoo Finance:

This is noteworthy as Canada is one of the USA's largest trading partners and this exchange rate reversal is a first for the USD versus the Canadian dollar. The strength of the Canadian dollar has likely driven up US exports to Canada in the third quarter GDP number that was just reported.

I see the Fed's cuts as making sense primarily in terms of helping banks' cash margins by widening the spread on loans they have outstanding that aren't in default. Banks that might be on the edge of solvency could be pulled back from the brink of receivership depending on their size.

Even though the Fed Funds rate has been lowered, there's still the issue in the interbank market of counterparty risk. I don't recall if it was the Fed Funds rate or LIBOR but recently one day's intraday data showed a high of 15%. So there are still confidence issues.

I could see the Fed raising by a quarter point by the end of the year depending on what happens with GDP. I think Trichet of the EU still needs to raise given the data that Claus Vistesen points out over at Alpha Sources.

German growth potential

Misplaced scepticism about Germany’s growth potential; a piece at Eurozone Watch by Sebastian Dullien hypothesizes "that Germany is just on a good path to increase its medium term growth performance." Writing from a US perspective, I have to say that I think that Dullein's piece has completely misinterpreted the US productivity story in the 1990's. While welfare reforms did in fact reduce the number of individuals on welfare, I am positive that the number of persons who moved from long-term unemployment to employment was not "in the millions". This link to a study by the US Bureau of Labor Statistics on long-term unemployment directly contradicts Dullein's assertion that "The U.S. recovery after the 1990/1991 recession started out with very strong job growth". The study states that

"The most obvious reason for the slow improvement in longterm unemployment following the two most recent contractions was the relatively slower pace of job growth. Following each of the recessions of the mid-1970s and early 1980s, employment rose by 1.5 percent within a year. In contrast, employment was virtually unchanged in the year following the 1990–91 and 2001 recessions. As shown in the accompanying table, even by the time long-term unemployment had started to decline, employment had risen by 1.0 percent or less. Also, in contrast to the recessions of the mid-1970s and early 1980s, the employment-to-population ratio continued to decline far longer following the recessions of 1990–91 and 2001."

Further, rapid growth in US productivity later in the 1990's was largely attributable to heavy investment in information technology which was driven by rapidly increasing capabilities of information technology and the massive increase in Internet-related business and consumer activity. I don't foresee any kind of major technological shift occurring in the next few years that would be centered in Germany, particularly considering that German firms have been scrimping on research and development, as Dullein noted. With respect to housing booms in the countries where the median age is under 40, the booms were created by reduced interest rates and easier credit conditions that allowed younger households to purchase homes. Now, it is clear that housing markets have oversupply in these countries, but domestic growth was aided by the booms. In the aged countries, there is little chance that GDP growth will be aided by housing construction, as the number of households in these countries will remain flat or begin to shrink soon.

Revision of Q1 GDP to 0.6%-ignored by market?

According to Marketwatch:

"There was next-to-zero market reaction to the Commerce Department's report that gross domestic product was cut to a 0.6% estimate, down sharply from an initial projection of 1.3%.

The 0.6% growth rate marked the slowest pace since late 2002. Economists polled by MarketWatch had expected growth of 0.7%.

The details of the report showed that consumers once more remained active, while the business sector was beset with sluggish spending and shrinking inventories.

Analysts said investors were able to brush off the report because the release of new Federal Open Market Committee meeting notes on Wednesday showed inventories returning to respectable levels. This could spell stronger growth in the present and future quarters.

"The weak figure is partly the result of a sharp downward revision to inventory investment during the quarter, which more than likely will result in stronger GDP figures in the next two quarters, including the current quarter," said Tony Crescenzi, chief fixed-income analyst at Miller Tabak.

"The inventory drag cut a percentage point from GDP in the first quarter after cutting 1.2 percentage points from GDP in the previous quarter," he said. "The removal of this drag will provide a significant boost to GDP. "

Okay....so businesses cut back production because their inventory levels were way too high...not surprising as demand for any products related to new home construction and home remodeling has been shrinking due to the housing bust. As consumers will no longer be able to draw significant amounts of cash from home sales or refinancings, and foreclosures and short sales increase, consumer spending is likely to weaken in Q2 and Q3.

So, depending on any surprise revisions in the final number, we have at least a "growth recession" as Nouriel Roubini says today, and could have actual negative GDP growth for the quarter. I think the proposition that production will increase because the inventory overhang was worked down is absurd, principally due to the likely weakening of consumer spending due to the housing bust factors I mentioned.

A positive aspect of this quarter's results is what happened with federal spending: it decreased 3.9% from the previous quarter, due to a 7.3% decrease in defense spending!

Also, the total contribution to the quarter's number from government spending at all levels was only .19%.

Finally, the collapse of the residential housing sector shows up in the GDP report with decreases in residential investment for the last six quarters as follows:

-.9    -.3  -11.1  -18.7  -19.8  -15.4

I would expect to see a dropoff in personal consumption as the negative effects of the production cutbacks and shrinkage in the housing sector on personal income work their way through the economy.

Roubini reports in the above linked post regarding the outlook of executives from one large institution regarding the housing bust:

"This writer was the featured speaker the other night at an event organized by one of the top 10 global financial institutions; after I gave my bearish outlook for the US economy and the housing market (in a debate with the chief economist of this firm), the four senior analysts of this bank for the housing sector, the mortgage lender sector and the MBS sector gave their outlook (it is all in public reports available for clients/investors of this firm).

In brief, their view is that: the housing market is still weakening and - based on their May survey of traffic - housing sales traffic is close to dead; it would take developers to shut down all new construction for almost a year to get rid of the excess supply of unsold homes; thus, downward home price action may continue for the next two years; the credit crunch in the mortgage market is only at its early stages and the distress and crunch is spreading from sub-prime to Alt-A and near prime mortgages; the major mortgage lenders have not yet started to get a reality check on how bad their assets are and properly mark them to market; the ABX index (the BBB- tranche) collapsed from near parity down to 60 in the last few months and has now recovered to close a still low 67; but, given how lousy were mortgage originations in 2005 and 2006, deliquencies in subprime will further increase in the next few months and further downward pressure in the ABX indexes may be expected. "

Ranking of world cities by GDP

A site titled City Mayors has the details of a study done by PriceWaterhouseCoopers which ranks world metro areas by each metro's GDP. Here is the ranking table from that research for the top 50:

Richest cities and urban areas in 2005

Rank	City/Urban area	Country	GDP in US$bn
1	Tokyo	Japan	1191
2	New York	USA	1133
3	Los Angeles	USA	639
4	Chicago	USA	460
5	Paris	France	460
6	London	UK	452
7	Osaka/Kobe	Japan	341
8	Mexico City	Mexico	315
9	Philadelphia	USA	312
10	Washington DC	USA	299
11	Boston	USA	290
12	Dallas/Fort Worth	USA	268
13	Buenos Aires	Argentina	245
14	Hong Kong	China	244
15	San Francisco/Oakland	USA	242
16	Atlanta	USA	236
17	Houston	USA	235
18	Miami	USA	231
19	Sao Paulo	Brazil	225
20	Seoul	South Korea	218
21	Toronto	Canada	209
22	Detroit	USA	203
23	Madrid	Spain	188
24	Seattle	USA	186
25	Moscow	Russia	181
26	Sydney	Australia	172
27	Phoenix	USA	156
28	Minneapolis	USA	155
29	San Diego	USA	153
30	Rio de Janeiro	Brazil	141
31	Barcelona	Spain	140
32	Shanghai	China	139
33	Melbourne	Australia	135
34	Istanbul	Turkey	133
35	Denver	USA	130
36	Singapore	Singapore	129
37	Mumbai	India	126
38	Rome	Italy	123
39	Montreal	Canada	120
40	Milan	Italy	115
41	Baltimore	USA	110
42	Metro Manila	Philippines	108
43	St Louis	USA	101
44	Beijing	China	99
45	Cairo	Egypt	98
46	Jakarta	Indonesia	98
47	Tampa/St Petersburg	USA	97
48	Pusan	South Korea	95
49	Kolkata	India	94
50	Vienna	Austria	93

Leading countries in share of global gdp

Here is a chart from Wikipedia that shows the rankings as of 1998:

Region / Country	GDP (PPP) mill. of International dollars	GDP Share percentage (%)
World	33 725 635	100
United States	7 394 598	21.9
People's Republic of China	3 873 352	11.5
Far East (excluding China, India, Japan, Russia)	3 140 603	9.3
Japan	2 581 576	7.7
South America and Central America	2 285 700	6.8
Republic of India	1 702 712	5.0
Germany	1 460 069	4.3
West Asia	1 236 328	3.7
United Kingdom	1 150 080	3.4
Russia and Central Asia	1 132 434	3.4
France	1 108 568	3.3
Canada and Australia	1 061 537	3.1
Africa	1 039 408	3.1
Italy	1 022 776	3.0
Eastern Europe (excluding Russia)	660 861	2.0
Mexico	655 910	1.9
Spain	560 138	1.7
Netherlands	317 517	0.9
Belgium	198 249	0.6
Sweden	165 385	0.5
Austria	152 712	0.5
Switzerland	152 345	0.5
Portugal	128 877	0.4
Denmark	117 319	0.3
Norway	104 860	0.3
Finland	94 421	0.3

There is a chart at econstats that lists every country in the world and their shares of world gdp; it's way too large for me to post here but it includes data up through 2006.

Here is a ranking as of 2005 from the World Bank:

Total GDP 2005
(millions of Ranking Economy US dollars)
1 United States 12,455,068
2 Japan 4,505,912
3 Germany 2,781,900
4 China 2,228,862
5 United Kingdom 2,192,553
6 France 2,110,185
7 Italy 1,723,044
8 Spain 1,123,691
9 Canada 1,115,192
10 Brazil 794,098
11 Korea, Rep. 787,624
12 India 785,468
13 Mexico 768,438
14 Russia 763,720
15 Australia 700,672
16 Netherlands 594,755
17 Switzerland 365,937
18 Belgium 364,735
19 Turkey 363,300
20 Sweden 354,115
21 Saudi Arabia 309,778
22 Austria 304,527
23 Poland 299,151
24 Indonesia 287,217
25 Norway 283,920
26 Denmark 254,401
27 South Africa 240,152
28 Greece 213,698
29 Ireland 196,388
30 Iran 196,343
31 Finland 193,176
32 Argentina 183,309
33 Hong Kong 177,722
34 Thailand 176,602
35 Portugal 173,085
36 Venezuela 138,857
37 Malaysia 130,143
38 Israel 123,434
39 Czech Rep. 122,345
40 Colombia 122,309
41 Singapore 116,764
42 Chile 115,248
43 Pakistan 110,732
44 Hungary 109,154
45 New Zealand 109,041
46 UAEmirates 104,204
47 Algeria 102,257
48 Nigeria 98,951
49 Romania 98,559
50 Philippines 98,306

Oregon economic growth expected to be slow to moderate

says says Timothy Duy, director of the Oregon Economic Forum at the University of Oregon. He was quoted in a story from the Portland Business Journal titled "UO reports economy down." Ke data from the story:

-"Four indicators -- Oregon residential building permits, help-wanted advertising in The Oregonian, Oregon nonfarm payrolls, and the interest rate spread -- improved."

-"The remaining four variables -- Oregon initial jobless claims, the Oregon weight-distance tax, U.S. consumer confidence and inflation-adjusted new manufacturing orders -- deteriorated."

-"employees on nonfarm payrolls in Oregon jumped by 7,000, snapping a trend of weaker numbers in the last half of 2006. Gains were concentrated in the professional and business services, trade, transportation, utilities, and construction sectors. Manufacturing employment, however, declined."

Key points in final 4th quarter US GDP report

Defense spending decreased 8.9%

Final 2005 GDP percentage change: 3.5% - that is a healthy number

Source: BEA

4th quarter US GDP 3.5%-utterly meaningless

From the BEA's release:

"The Bureau emphasized that the fourth-quarter "advance" estimates are based on source data that are incomplete or subject to further revision by the source agency (see the box on page 4). The fourth-quarter "preliminary" estimates, based on more comprehensive data, will be released on February 28, 2007."

We won't know the real number until the final data are released in several months.

Also from the BEA's release: "Quarterly estimates of GDP are released on the following schedule: "Advance" estimates, based on source data that are incomplete or subject to further revision by the source agency, are released near the end of the first month after the end of the quarter; as more detailed and more comprehensive data become available, "preliminary" and "final" estimates are released near the end of the second and third months, respectively. The "latest" estimates reflect the results of both annual and comprehensive revisions."

I suppose market activity based on the release of the advance estimate is due to either institutions reacting to their forecasts of the advance release and their analysis of historical revisions to the GDP number, or to people just reacting to the headline without taking a closer look at the data.