Last week we received positive readings for some key economic indicators. But I still see plenty to worry about.

Source: FRED

On Tuesday the Census Bureau announced that U.S. retail and food services sales in August were 2.7% higher than in July on a seasonally adjusted basis. True, 2/3 of the additional $9 billion in spending was attributed to motor vehicles and parts, and September car sales could be much worse than August. Another 1/6 of the new spending came from gasoline stations, and the higher average gasoline prices in August are hardly cause for celebration. But even excluding autos and gasoline, core retail sales were up 0.6% in August. Here's the summary from Stephen Stanley of RBS:

after a string of contractions, these data suggest that consumer demand is, at a minimum, stabilizing. Core retail sales may even

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This post is a guest contribution by Asha Bangalore* of The Northern Trust Company.

The employment report of July, published on August 7, included several signs suggesting that the labor market is stabilizing. The next question is what comes after stabilization. Historically, payroll employment has posted gains within 12 months into a recovery/expansion and gathers significant momentum by the end of 24 months in all post-war business cycles with the exception of the 1991 and 2001 recoveries (see table 1). The January - July 1980 recession was a short recession followed by another recession in July 1981. The 1991 and 2001 recoveries have been coined as ‘jobless recoveries’ based on the nature of the growth of payroll employment and the changes in the jobless rate.

Table 1 Change in Payroll Employment from Trough of Business Cycle

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During the summer, I had the good fortune to attend two excellent conferences focused on new findings in exchange rate economics (yes, not all economic research is focused on the financial crisis and recession). The first was a Bank of Canada-European Central Bank conference Exchange rates: The global perspective, and the second was the NBER International Finance and Macroeconomics Summer Institute session "Exchange Rates and Relative Prices".

Figure 1: Log nominal value of US dollar (blue) and real value of US dollar (red), against currencies of major trading partners. NBER defined recession dates shaded gray, assuming the recession has not ended by July 2009. Source: Federal Reserve Board.

The Bank of Canada-ECB conference papers are here. All the papers, as well as powerpoint files of the presenters and discussants, are available from the conference website; I've reproduced some of the abstracts below.

Order flows and

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Links to some interesting papers that I recently read.

The first comes from a conference on financial markets held at the start of this month at the University of Illinois in Chicago. Last fall, V.V. Chari, Larry Christiano, and Pat Kehoe received a lot of attention (e.g., Tabarrok, Avent, Economist, Kwak, Bonddad, and Thoma [1], [2], [3],) for noting that aggregate lending by banks was in fact increasing during the period in which many analysts were describing it as sharply curtailed. At the Chicago conference, Federal Reserve Bank of Boston economists Ethan Cohen-Cole, Burcu Duygan-Bump, Jose Fillat, and Judit Montoriol-Garriga argued that those aggregate numbers conceal some very significant compositional trends, namely, previously existing lines of credit were being drawn on by borrowers and a sharply increased fraction of lending was consumed by securities originally intended for securitization

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Events, particularly these days, tend to outrun the best laid plans to anticipate research trends. And it might seem that this was true in the case of this conference, sponsored by UCSC's Santa Cruz Center for International Economics, the Journal of International Money and Finance, and the Federal Reserve Bank of San Francisco. The conference was planned last year, at a time when most academic researchers were aware and concerned about the incipient economic slowdown, and whether the major economies would "de-couple", and in turn how these factors would impact the constellation of global imbalances.

As it turns out, the papers were all, in my opinion, remarkably germane to issues we're concerned about right now: how the composition of debt determines vulnerability to crises, the effect of capital controls on capital flows, the role of the IMF, and the usefulness of macroeconometric models to predict exchange

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There is so much chaff floating around about the roles of Fannie and Freddie and of the Community Reinvestment Act in the current crisis, despite the best efforts of economists like Jim Hamilton [0] [1], Mark Thoma and Janet Yellen, that it seems worthwhile to once again go through some of the arguments that have been forwarded.

From David Goldstein and Kevin G. Hall, "Private sector loans, not Fannie or Freddie, triggered crisis":

Federal Reserve Board data show that:

More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions. Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year. Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics. From David Goldstein and Kevin ...

The $2.66 trillion municipal bond market is embroiled in the overall credit market mess, creating an unusual complex of risks and opportunities.

The supply-demand forces in the municipal bond market have been unfavorable in the past year, causing prices to decline.

click images to enlarge

The mutual funds in this table are Vanguard Admiral class.  The minimum investment is $100,000, but the expense ratio is only 8 basis points.  Their Investor class shares carry a 15 basis point expense ratio.  Either expense is lower than most alternatives.

Negative Forces on Muni Market:

Some of the adverse circumstances impacting muni prices and rates include:

Credit downgrades for municipalities Near-bankruptcy of the muni bond insurers Unwinding of muni bond positions by hedge funds deleveraging Failure of the auction rate muni market Rise in long-term muni issuance as short-term rates became burdensome Rotation from muni to Treasury bonds in flight from risk of all ...

Red Hat’s Purchase; Toll Bros. NYC Worries; Dollar Rally; Unilever’s New CEO; Fed President Sees Room for Cut; Boeing’s Labor Woes Red Hat Inc. (RHT) yesterday (Thursday) announced it had purchased privately held software company Qumranet Inc. for $107 million in cash. The Raleigh-based software distrubutor expects the purchase to knock 5 to 6 cents off of its annual earnings per share, The Associated Press reported. Red Hat expects the deal to add $20 million in revenue by the next fiscal year. Homebuilder Toll Brothers Inc. (TOL) admitted to concerns about the New York City condo market, which has been one of the last holdouts of the current U.S. housing recession. “It has felt some of the storm that’s come to the residential real estate market in the country,” Chief Executive Bob ...

Source This morning we were pleased to welcome Janet Yellen, President of the Federal Reserve Bank of San Francisco, to our UCSD Economics Roundtable. She focused on three main challenges: the housing slump, financial market turmoil, and commodity prices, which she likened to the three witches from Macbeth. Her complete speech is available from the FRB SFO Here are some excerpts. Janet Yellen (photo courtesy of FRB SFO). Housing. Unfortunately, it appears to me that there are at least three reasons for thinking that housing prices have further to fall. First, the ratio of house prices to rents-- a kind of price-dividend ratio for housing-- still remains quite high by historical standards.... Second, inventories of unsold homes remain at elevated levels.... Third, the futures market for house prices predicts further declines in a number of metropolitan areas this year.... Financial markets. ...