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Two years

This Labor Day weekend marks the second anniversary of this blog. From nothing it has grown to 1500-2000 visits per weekday, about double what it was a year ago. It has accumulated almost 1,000,000 pageviews in the past two years, and is now running at 2000-2500 pageviews per weekday. The number of readers may be much higher than is reflected in these statistics, however, since most of my posts are also published on Seeking Alpha, where I'm currently ranked #11 out of 100 authors, with some 40,000 followers. Plus, the blog is ranked #35 out of 461 on Econolog.

I'm still doing the blog ad honorem. One of my original motives for starting the blog was to find a way to give back after so many years of taking, and I'd like to think the blog's growing popularity is a sign that I have something valuable to offer. (Caveat lector: free advice can often be worthless.) I've learned a lot my from supply-side mentors, and this is one way of keeping supply-side theory alive, since it is vastly under-appreciated in my experience. I might still be in the workforce if it weren't for my hearing disability, and the blog provides a great outlet for my passion for economics and markets without the need for commitments or commuting. 

My political orientation is libertarian and I am a long-time supporter of the Cato Institute, about whom George Will recently said: "Given freedom, the American people will flower. Given the Cato Institute, the American people will, in time, secure freedom." Like Cato, I will disparage any politician, regardless of party, who promotes policies which I find antithetical to free markets and individual liberty. I think every investor should pay great attention to politics, since good or bad policies can make a huge difference to the economy and the markets.

Finally, my thanks to the many loyal readers and commenters. I'm happy to say that the vast majority of the thousands of comments posted here have been thoughtful and constructive. If there is one thing that I miss in retirement, it is the ability to travel the country and interact with clients that in turn were in charge of managing huge sums of money. I have always learned a lot by having to answer tough questions, and I now receive those almost daily.

Service sector index weak, but not fatally

The August ISM index of business activity in the service sector recorded a noticeable drop that could possibly signal the onset of the double-dip recession that so many have been waiting for. But the index is still comfortably above 50, which means that the majority of service sector firms see conditions improving. It is also possible that the recent drop in the index could simply reflect the pervasive pessimism that has permeated the collective consciousness in the past few months.

In support of the view that the recent decline was more the result of psychology rather than an actual deterioration of economic conditions, I point to the action in the commodity markets, where the prices of basic industrial commodities have been rallying in recent months and are now within inches of all-time highs. I have to believe that rising commodity prices reflect a broad-based strengthening in demand worldwide, and that this in turn is supportive of an ongoing expansion in the U.S. economy. Strong commodity prices are also showing up in the prices paid component of the ISM indices (second chart above), and this effectively rules out the much-anticipated and much-dreaded deflation that has permeated the markets of late. According to the ISM surveys, fully 60% of manufacturing and service sector firms report paying higher prices. That is hardly the stuff of which deflations are made.

9 million receive unemployment insurance

Just realized I haven't posted these charts for awhile, so here they are with updated data. Note the recent rise of almost 2 million in those participating in the emergency claims program, which recently was generously extended by Congressmen eager to help those who haven't found a job for a long time. Note also how the percentage of the labor force receiving unemployment insurance today is almost 50% greater than it was at the peak of the 1982 recession. A reasonable person might wonder if there is some connection between record high levels of workers on the dole, and persistently and distressingly high rates of unemployment.

Private sector adds 1.8 million jobs

I doubt you'll see this headline anywhere else. But that's how many new private sector jobs have been added so far this year, according to the household survey of employment. The household survey has a strong tendency to lead the establishment survey, especially in the years following the end of a recession. That's because it is based on a random telephone survey of households, whereas the establishment survey relies on sending a questionnaire to known businesses. So the household survey is more likely to pick up the newly self-employed and those employed by new startups that have not been recognized by the establishment survey yet.

Note that it took almost two years following the 2001 recession for the establishment survey to show an increase in jobs, whereas the household survey showed new jobs after a little over one year.

In any event, both surveys are now showing clear signs of new jobs. This should lay to rest any lingering concerns about a double-dip recession, but it's not enough to convince anyone that the economy is in good shape. The unemployment rate remains very high at 9.6%, and there are still some 9 million people receiving unemployment insurance.

This news has already jolted the markets, however, because it paints a much rosier picture than the market had been assuming. I see lots more upside potential to both equities and Treasury bond yields. There is no double-dip recession—in fact, we are in the midst of a recovery that is ongoing, albeit relatively modest. I continue to expect the economy to expand at a 3-4% rate for the foreseeable future.

UPDATE: Here's a chart of the six-month annualized growth rate of private sector jobs according to each survey. The 2% growth rate reflected in the household survey equates to a little over 200K jobs per month, which if continued, would be enough to bring down the unemployment rate very gradually. Regardless, it's highly doubtful we'll see any meaningful decline in the unemployment rate prior to the November elections. People are going to be moaning and groaning about the supposed "jobless recovery" for many months I suspect. This is the pattern that tends to follow every recession: the man on the street doesn't feel the recovery until long after it has been obvious in the numbers.

Feeling good in Germany

Just ran across this monthly survey of about 7,000 firms in Germany in the manufacturing, construction, wholesaling and retailing industries. The survey asks for their assessment of the current business situation and their expectations for the next six months. I hadn't updated my chart for awhile, and was impressed with how strong the index has been this year. The index in this chart has a correlation to German GDP growth of about 0.7, so it is a pretty good indicator of how healthy conditions are in the core of Europe. The German economy has grown 3.7% in the year ending last June, more than the 3.0% recorded for the U.S. economy.

What's good for Germany can't be bad for us.

The embarrassment of cash

I last touched on this topic in a post last October, and it's worth reading again. One excerpt:

To willingly hold cash that yields zero, you must be convinced that there is death and destruction awaiting at every turn. The market is climbing terrifying walls of worry, yet on the margin people are slowly being forced to reduce their money balances and increase their exposure to risk, and consumers are spending some of the cash they have hoarded, and it all adds up to a virtuous cycle that is giving us a V-shaped recovery. As long as the economy fails to deliver death and destruction, the market finds itself compelled to keep this virtuous cycle going.

After the market rallied strongly into April of this year, a panic attack set in, triggered by the potential for a Greek default that could bring Europe to its knees, and then fueled by intense speculation that the U.S. economy was on the verge of a double-dip recession due to continued weakness in the housing market and consumer deleveraging. This justified the fears of those holding cash, but since the low point in equity prices in early June, we've seen mounting evidence that a recession is far from imminent, and indeed it seems likely that the economy is still growing—at the very least it is clear that there are no signs of "death and destruction." The manufacturing sector is quite healthy; commodity prices are rising, and close to all-time highs; global trade is booming; China and India are not collapsing; unemployment claims are not rising; credit spreads are not soaring, and swap spreads are very low; corporate profits are very strong; the Fed is not about to take any actions that would endanger the markets; Washington is getting closer and closer to extending some or all of the Bush tax cuts.

So we are now in another cycle in which cash proves to be an embarrassment because the economy is not collapsing. The market is now climbing another wall of worry, but on the margin some of those holding cash are trying to reduce their cash balances and increase their exposure to risky assets. Consumers are likely still willing on the margin to spend some portion of the cash balances they began accumulating in late 2008. Confidence is slowly returning. All of this adds up to a virtuous cycle that points to more growth, albeit growth (3-4% being my guesstimate) that will not result in any remarkable decline in the unemployment rate.

The main point is this: when cash yields almost zero, you really need bad things to happen. If they don't, then you are passing up on huge opportunities to profit from, for example, the 8-9% yields on high-yield bonds, and the 7% earnings yield on the S&P 500. The absence of bad news is like a leak in a dike, behind which sits a massive lake of cash and cash-like instruments earning zero. The force of the water (many trillions of dollars) seeping out through the hole in search of higher returns is going to be very difficult to stop and the hole will almost certainly get bigger with time.

There are plenty of reasons to stay bullish on risky assets.

Jobless claims flat to down

The top chart shows seasonally adjusted jobless claims, while the bottom chart shows the actual level of jobless claims. I've maintained for the past month or so that faulty seasonal adjustment factors have been behind the recent volatility in the seasonally adjusted numbers (which is what everyone focuses on), and I think that with time I'm being proven correct. This means that the big drop in claims in early July was a non-event, just as the big rise in claims in August was a non-event. The underlying reality is that claims have been flat to down this year. It's encouraging that the unadjusted number is now at a 2-year low.

Absolutely no sign of a double-dip recession here.

Car sales rise at 17% annual rate

The headlines are focusing on the fact that August car sales were down 19% from a year ago, but that is a bad comparison because August '09 sales were boosted temporarily by the cash for clunkers program. If instead we compare current sales to April of last year, when the market looked like it had hit bottom, then sales are up at a 17% annualized rate, abstracting from government distortions and the typical monthly noise in this series. Sure, the level of sales remains extremely low, but to me it's clear that sales have risen at a pretty fast pace since the recession ended. Sales have generally been stronger than expected, so this results in some inventory depletion, which then results in some production ramp-ups, which in turn trickles down to more orders from suppliers, etc. This is the way any recovery happens.

Help wanted ads surge 22%

The Conference Board keeps a tally of online help wanted advertising, and it's shown in this chart. The index is up 22% from its year ago level (measuring it that way avoids the problem of what appears to be some seasonal variations in the data), and almost all the way back to its all-time highs. At the very least this reflects growing business confidence, and likely presages an increase in new hiring.

HT: brodero

Corporate layoffs remain very low

According to the folks at Challenger, Gray & Christmas, large, publicly announced corporate layoffs are almost a thing of the past. The first step toward an expanding labor force is to stop firing people, and we've met that condition in spades, according to this report. And of course this is one more of many signs that there is no double-dip recession in progress, nor is there any imminent threat of one.

Construction spending remains weak

Residential construction spending slipped a bit in July, but since it only represents less than 2.5% of GDP, that's a drop in the bucket. Nonresidential spending also slipped, but I don't know anyone who expected it to strengthen; there's still plenty of idle capacity out there. Construction remains the weakest sector in the economy, but it no longer poses a serious threat to the overall GDP growth. The economy has been very busy in recent years shifting massive amounts of resources away from construction and into other sectors. This is a major rotation effort that will probably require a bit more time to be complete.

Manufacturing activity continues strong

The August ISM manufacturing index came in quite a bit stronger than expected, refuting some recent and scattered signs of a slowdown in activity. Indeed, this index (above) strongly suggests that the relatively tepid GDP growth in Q2 was an anomaly, and that we should see stronger growth in the second half of the year.

The export orders index slipped marginally, but remains comfortably above 50, suggesting ongoing expansion in that sector of the economy.

The prices paid index moved a bit higher, reflecting, as it has for quite some time, a gradual buildup of inflation pressure that is undoubtedly being driven by rising commodity prices. It also continues to signal that deflation is nowhere to be seen.

The strongest part of the report was the employment index, which has reached a level that was last seen at the end of 1983, when the economy was embarked on the Reagan boom. This also counters the relatively weak ADP employment number released today.

The bears will have to go through contortions to explain away the across-the-board good news from this report.

Gold leads commodity prices, and both respond to monetary policy

This chart covers almost 30 years of gold and commodity prices, and I think it shows an impressive correlation between the two. Moreover, it shows that gold prices tend to lead commodity prices—by as much as a year—at important turning points, which further suggests that commodities likely still have some impressive upside potential.

I think it's also important to note the strong correlation between gold and commodity prices, which speaks volumes about how important monetary policy is to both commodities. It's no coincidence that both gold and commodities trended lower throughout the 1981-2001 period, during which time the Federal Reserve was generally pursuing a policy that brought inflation down and kept it relatively low. Recall also that just the opposite happened in the 1970s, when the Fed was generally easy and inflation, gold, and commodity prices rose.

And it's no coincidence that gold turned up in early 2001, followed by commodities by the end of the year, as the Fed embarked on what would eventually prove to be the most dramatic reduction in short-term interest rates in modern times: lowering the Fed funds target rate from 6.5% to 1% over a 3 1/2 year period.

So, gold and commodity prices can be strongly influenced by monetary policy. Of course, commodity prices can also be influenced by the imbalances that arise between the growth-driven demand for commodities and their supply. But from the looks of this chart—gold and commodities were weakest in the late 1990s when the economy was so strong that the Fed worried about "overheating"—monetary policy is the more important influence.

And so the ongoing rise in gold and commodity prices is an important sign that monetary policy is easy, and thus likely to result in rising inflation.

Harpex update

After a six-week pause, the Harpex index of container shipping costs in the Atlantic is once again on the rise. As an alert reader pointed out last week, the strongest component of the index is for the Class 8 type of ship—the very largest of the containerships. That sub-index has now returned to its early 2007 levels, having risen a spectacular 300% from its low 8 months ago. That likely counts as the most impressive V-shaped recovery I've seen so far.

Gold as an investment

With gold only few dollars shy of marking another all-time high, it's appropriate to review the investment and central banking ramifications of gold at $1250/oz.

When approaching gold from the point of view of an investor, the first thing you should ask yourself is whether you think gold prices can rise by enough in the future to at least equal the returns you can lock in on risk-free investments. (I'll ignore transactions and storage costs for the sake of simplicity.) To be attractive, any risky investment needs to at least promise to do better than the risk-free alternative, and Treasuries are effectively the "gold standard" of risk-free investments, the benchmark against which all risky investments need to be evaluated. (Those who think the U.S. will default on its Treasury obligations may be excused from this class.)

A central bank pursuing a gold standard might ask itself a similar question, but from a different perspective: is today's interest rate environment sufficient to leave investors indifferent between owning Treasuries or gold?

Investors who buy gold need future gold prices to exceed the hurdle represented by, say, 10-yr Treasury yields. With 10-yr Treasuries trading today at 2.5%, an investment in gold makes sense only if gold prices rise by at least 2.5% per year over the next 10 years. Central bankers following a gold standard are content as long as investors in aggregate can't decide whether gold will outperform Treasuries, a condition which if met results in relatively stable gold prices, but interest rates that change to offset investors' changing perceptions of gold's potential price performance.

This chart shows the historical price of gold in blue, and is plotted with a semi-log scale for the y-axis to facilitate the comparison of annual returns. The slope of the colored lines represents the hurdle price of gold that an investor at different points of time must expect gold to exceed. Gold is good investment when future prices exceed today's hurdle rate, and a bad investment if future prices fall below today's hurdle rate.

From 1970 through 1980, gold beat its hurdle rate almost every year, except for 1975-78. By 1979, investors were so anxious to buy gold, figuring it would have another winning year, that gold prices briefly soared to $850/oz. in early 1980. By this time, however, the Fed had taken a hugely restrictive policy stance, with the result that 10-yr Treasury yields had reached double-digit levels.

With the huge hurdle rates that resulted from tight money, gold investors were by and large extremely disappointed from 1980 through 2001, as gold consistently underperformed Treasuries. Not coincidentally, inflation fell from 14.8% in early 1980 to a mere 1.1% in early 2002.

Since 2002, gold has consistently exceeded its Treasury hurdles, leaving investors emboldened and anxious for more. Unlike the situation in 1980, however, the Fed has done the opposite of tightening, pledging instead to keep interest rates very low for an extended period. That means that the future hurdle rate for gold is so low that it shouldn't be too hard to beat. Thus, gold prices are still rising, and will probably continue to rise until such time as the Fed decides to change course. I should note here that in real terms, gold is still significantly below its peak price in January '80 (which I calculate would have been $2370 in today's dollars), so it's not unreasonable at all to think that gold could reach $1500 or even $2000.

I have said as much in the past (e.g. that gold is likely to rise further), but have also cautioned that with gold at these levels, it is a very risky investment and not for the faint of heart. As a retired person and a long-term investor, I have decided to eschew any exposure to gold, but a more adventurous speculator would likely find gold attractive. For my part, I think equities hold out the better promise of long-term expected returns.

More evidence that housing has stabilized

The Case Shiller home price data for June (which reflects a moving average of prices several months before) ticked up, and now show that housing prices, in real terms, have been essentially flat to slightly higher for the past 16 months. The top chart shows an index of 20 housing markets, whereas the bottom chart shows an index of only 10 markets but over a longer time frame. Both tell the same story: increasingly, it looks like the housing market has found a new equilibrium clearing price level.

Housing skeptics are anticipating (as they have been for most of the past year) that this run of relatively good news will soon end, however, thanks to the recent expiration of the government's subsidy for new homebuyers. Those concerns may prove well-founded, but then again they may not. We do know that sales activity dropped significantly in the months following the data included in the Case Shiller release, but we don't know much about how prices behaved in the past few months.

I continue to think that prices have fallen enough to at least hold steady at current levels for the foreseeable future. As the top chart shows, there has been a 33% decline in inflation-adjusted housing prices from their 2006 peak, and that is by far the biggest downward price adjustment in nationwide housing prices in my lifetime. In addition to a one-third decline in home prices, the cost of borrowing money to buy a house today has dropped by 30% over the same period, since 30-yr conforming mortgage rates have fallen from 6.7% in 2006 to 4.7% today. Combine those two price declines and you get an effective decline of 54% in the monthly cost of buying the typical house. 

If you subsidize unemployment, don't be surprised if you get more of it

Robert Barro has a good article in today's WSJ, titled "The Folly of Subsidizing Unemployment."  In it he argues reasonably that "the expansion of unemployment-insurance eligibility to as much as 99 weeks from the standard 26 weeks" has made the economy less efficient "because the program subsidizes unemployment, causing insufficient job-search, job-acceptance and levels of employment." My chart above helps illustrate the numbers he uses in his article, making it clear that we have never before seen such a large number of people receiving unemployment compensation. The 1981-82 recession saw a higher unemployment rate than we have seen in the recent recession, but one-third fewer people were subsidized for not working. This undoubtedly helps explain why this recovery has proceeded at a very disappointing pace.

... it is reasonable during a recession to adopt a more generous unemployment-insurance program. In the past, this change entailed extensions to perhaps 39 weeks of eligibility from 26 weeks, though sometimes a bit more and typically conditioned on the employment situation in a person's state of residence. However, we have never experienced anything close to the blanket extension of eligibility to nearly two years. We have shifted toward a welfare program that resembles those in many Western European countries.
The administration has argued that the more generous unemployment-insurance program could not have had much impact on the unemployment rate because the recession is so severe that jobs are unavailable for many people. This perspective is odd on its face because, even at the worst of the downturn, the U.S. labor market featured a tremendous amount of turnover in the form of large numbers of persons hired and separated every month.
For example, the Bureau of Labor Statistics reports that, near the worst of the recession in March 2009, 3.9 million people were hired and 4.7 million were separated from jobs. This net loss of 800,000 jobs in one month indicates a very weak economy—but nevertheless one in which 3.9 million people were hired. A program that reduced incentives for people to search for and accept jobs could surely matter a lot here.

Inflation update—still tame, but still a concern

If you don't believe that the Bureau of Economic Analysis is staffed by professionals that do their best to measure inflation accurately, then this post is not for you. I've been working with the BEA's numbers since 1980, and I have never managed to turn up evidence of gross or chronic error in their numbers. It's fashionable to say that the government is systematically understating inflation, but as the Boskin Commission found, the CPI, for example, may actually be overstating inflation (the CPI is calculated by the Bureau of Labor Statistics). I've compared the CPI to the broader and better-calculated personal consumption deflator (shown above), and to me it looks like there is indeed a case to be made that the CPI overstates inflation as measured by the PCE deflator by maybe as much as 0.5% per year over time. But that's relatively small potatoes. The PCE deflator is arguably the best measure of inflation at the consumer level that we have, and that's why the Fed has adopted it as their preferred measure of inflation.

I've been worried for almost two years that the Fed's late-2008 quantitative easing would eventually translate into higher inflation, and so far I've been dead wrong. As the chart above demonstrates, inflation—whether you exclude food & energy or not—has been close to or within the Fed's 1-2% target range since early last year. On balance, and since the mid-1990s, the Fed has come pretty close to keeping inflation within target. That's pretty impressive, and that's coming from someone who has severely criticized the Fed in the past.

It's also impressive that core inflation has been relatively subdued and stable for the past two years, because relative price stability is only apparent on an aggregate basis. Some prices have gone down by a lot (e.g., anything associated with housing, plus a lot of durable goods prices), while other prices have gone up by a lot (e.g., most industrial commodity prices). And of course energy prices have gone up and down by an extreme amount in recent years, but oil prices today are just about equal to their average of the past four years.

I hesitate to speak for other economists, but I would have bet money that, prior to the Fed's quantitative easing program which started in the fourth quarter of 2008, virtually all economists would have predicted a significant rise in inflation in a scenario in which—as actually happened—the Fed expanded its balance sheet and the monetary base by well over $1 trillion in a matter of months. I don't have a good explanation for why inflation has not gone up, but on the surface, it would appear that the Fed's massive injection of reserves was just the right amount: enough to keep us from experiencing deflation, but not enough to push inflation higher. From a monetarist point of view, in late 2008 the world suddenly developed a massive demand for dollar liquidity, and the Fed managed to satisfy that demand just about perfectly.

This is not to say that inflation is going to remain well-behaved, however. As Milton Friedman always said, the lags between monetary policy and inflation can be long and variable. It may take years before the Fed's over-supply of bank reserves results in a significant rise in inflation. The U.S. economy is huge and most prices and wages are sticky—there's considerable pricing inertia that must be overcome before prices can rise at a faster clip. But most importantly, the Fed's quantitative easing program has not finished yet; we won't know for some time whether the Fed is able to withdraw its excess supply of bank reserves in time to keep a flood of excess money from washing through the system.

I remain concerned that the risk of a significant rise in inflation is much greater than the risk of deflation. The evidence of an effective oversupply of dollars is already out there: the dollar is very weak, gold prices have soared, and most commodity prices have risen substantially. Plus, there is growing evidence that the demand for dollars is weakening on the margin, as this chart of M2 demand (the inverse of M2 velocity) shows:

One of the unique characteristics of the 2008 recession was the huge and rapid increase in money demand that occurred in the wake of the global financial panic. People the world over suddenly wanted to hold more dollars, and in doing so they sharply cut back on their spending. The dollars that were accumulated in bank accounts (and beneath some mattresses, no doubt) are now slowly being returned to normal circulation. This has the effect of increasing the amount of money available to the economy, which in turn can fuel growth as well as higher inflation.

Putting the yen into perspective

"Japan Battles Soaring Yen," is the title of the front-page feature article in today's WSJ. The yen recently strengthened to 84 versus the dollar, the strongest level seen since the yen briefly flirted with 80 back in April '95. The yen has been the strongest currency in the world over the past 40 years, rising from just under 400 yen to the dollar in the early 1970s, to 85 today.

The inherent strength of the yen is also seen in this second chart, which shows the value of gold in dollars, euros, and yen. Since 1977, gold has risen about seven-fold in dollar terms, about five-fold in euro terms (linking the euro to the DM), and only two and a half-fold in yen terms. The yen's long-term strength is not so much due to some mysterious force, as it is due to Japan's central bank. Japan's currency is strongest relative to gold and other currencies because the Bank of Japan has done a much better job of keeping inflation low than any other central bank.

But currency strength is best measured in inflation-adjusted terms, not in nominal terms, and that's the point of the first and third charts. The blue line in the first chart is the nominal value of the yen/dollar exchange rate, while the green line is my calculation of the purchasing power parity (PPP) value of the exchange rate. The PPP value is the level of the exchange rate over time that would make prices in Japan roughly similar to corresponding prices in the U.S. This line is driven by changes in the relative inflation rate between the two currencies. Japan's PPP has been rising relative to the U.S. dollar ever since the late 1970s because Japan's inflation rate has been much lower than ours. In fact, Japan's CPI has risen only half as much as our CPI since early 1977. This inflation differential would dictate that the dollar should have lost about half its value against the yen, and that is reflected in the appreciation of the dollar/yen PPP exchange rate from 240 to 120.

The degree of a currency's strength can be measured by comparing its current value to its PPP value. On that basis, in the mid 1990s the yen was far stronger relative to the dollar than it is today, as seen in this last chart. By my calculations, the yen today is only about 40% "overvalued" vis a vis the dollar, which means that a U.S. tourist today should expect to find that things in Japan cost on average about 40% more than they do in the U.S.

According to the headlines, the yen is incredibly strong relative to the dollar. But when you look at relative inflation differentials, the yen today is not much stronger, on average, than it has been since the mid-1980s.

Incomes and spending are improving

The government's ability to measure income and spending is subject to lags, revisions, and estimates—so I don't tend to pay too much attention to data on personal income and spending. It's better to use real-time pricing data—such as commodity prices—to see what is going on with supply and demand on the margin. Nevertheless, I post these charts of growth in real personal income and spending because they show that the economy has clearly been in recovery mode for the past year, and there is no sign in these numbers of a double-dip recession.

Skeptics will point out that both consumption spending and incomes have been bolstered by hundreds of billions in transfer payments, so they overstate the true strength of the economy. I would counter by noting that transfer payments by definition involve taking money from one person's pocket and putting it into another's. One person can spend more, but the other has to spend less. From a macro point of view, this is a wash, so these numbers are, I think, a legitimate approximation of what is really going on in the economy: a modest recovery from a fairly deep recession.

Skeptics will also point out that the savings rate has increased significantly—from 2% of disposable income to 6%—over the past three years and that is sapping some of the economy's strength. I would counter by noting that whatever one person saves, another person must perforce spend; people no longer save by stuffing money under their mattress, they put the money into a bank, for example, and the bank then lends that money to someone else who then spends it. An increased savings rate doesn't mean less spending overall, it means that spending is being redirected, away from typical consumption items to, presumably, things which are likely to boost the economy's productivity.