Archives for June 2013

While Q1 GDP growth was 2.5%, it will probably be the best performing quarter of the year. Add to that continued contractionary fiscal policy in the form of both the sequester and the Fiscal Cliff deal, continued weak employment growth, declining exports and a lackluster manufacturing sector and suddenly recessionary fears are palpable. After all, a recession will inevitably come and it has been almost six years since the start of the last one. Aren’t we kind of due? Turns out, the answer is no, no and no! If history is any guide – and it’s a very good one in this case – there is no recession in sight.
Since 1970 there have been seven recessions, and interestingly enough, each one has been preceded by an inversion in the yield curve, a situation where short term interest rates are higher than long term interest rates. Rarely is there an indicator that is seven for seven over a period of 44 very dissimilar years. The last time the yield curve inverted and a recession did not follow was in 1966-67, and though there wasn’t a recession, the economy slowed substantially with GDP growth of less than 1% for 21 straight months.
Normally, interest rates are higher the longer the period of time money is lent. For example, today a one-year Treasury bill yields 0.15%/year, a 10-year Treasury note pays 2%/year and a 30-year Treasury bond pays 3.125%/year. After all, the longer you lend someone money, in this case the government, the more interest rate risk, inflation risk and credit risk you incur, and investors must be compensated for these risks.
However, from time to time this normal relationship breaks down. One explanation for this phenomenon is that by raising short-term rates (to slowdown an overheating economy with rising inflation), the Federal Reserve discourages bank lending, as banks generally borrow short and lend long. And when the yield curve is inverted, banks have much-reduced profit margins, and this reduction in lending causes a recession. A second explanation for an inverted yield curve is that investors expect future short-term interest rates to decline because they expect a recession. As a result, investors expect the central bank to lower interest rates to counteract the expected recession. And when this happens, investors plow into low-yielding long-bonds to lock in yields they expect will be still lower in the future.
Regardless of the reason, from time-to-time the yield curve inverts. Today, the difference between ten-year Treasury notes and one-year Treasury bills is 1.85%. Assuming the Federal Reserve felt compelled to start raising short-term interest rates soon (and let’s be clear, it does not), it would take, based on history, about two years before yields on one-year Treasury bills were higher than yields on 10-year Treasury notes. And again using history as our guide, it generally takes another 12 months after the yield curve inverts before a recession begins. This suggests that we have at minimum three years before the next recession. Of course, given the expansionary state of monetary policy and the laser-like focus of the Fed in preventing a recession, my bet is we have quite some time before the recession of 2018!
Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC and can be reached at Elliot@graphsandlaughs.net. His daily 70 word economics and policy blog can be seen at www.econ70.com.
 

It would be nice if Downtown residents – or for that matter all city residents – could have a nice grocery within walking distance of their homes or workplaces.
But for most Albuquerqueans that’s not the reality.
Bernalillo County and the city are considering pumping in incentives to bring a 12,000-square-foot grocery to city-owned land at Second and Silver SW. The Trader Joe’s-size store would occupy the ground floor of a four-story building that would also house 61 apartment units and other retail space. Mayor Richard Berry says it could be a “catalyst” for Downtown. And it could be a great amenity for the city’s urban center that slowly is being revitalized. The Berry administration is working on a development agreement with Geltmore LLC, which won a request for proposals for the project.
The County Commission recently approved an “inducement resolution,” a step that allows negotiations to move forward on an industrial revenue bond deal that includes a $900,000 tax break for Geltmore. Final approval of the bond deal is expected in August.
Paul Silverman of Geltmore calls the bonds “an important part of our financial structure.”
However, Commissioner Wayne Johnson raises a reasonable question. Is it fair for the county (or city) to help create competition for other nearby businesses that didn’t get a subsidy? Should the county give one store project a nearly $1 million boost while a competitor goes empty handed?
Project backers say the other full-size grocery in the Downtown area, the recently remodeled Lowe’s Market at Lomas and 11th NW, is too far to walk to from some points. Since the two sites are just over a mile apart, it could be said that walking distance is in the eye of the beholder.
While this looks like a good commercial project for the area with a built-in consumer base just upstairs, the city and county need to be sure it’s a fair deal with a clear picture of the benefits it would generate for a Downtown that sadly is heavy on office space and bars.
By Albuquerque Journal Editorial Board (Albuquerque Journal)
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