Yesterday, the Los Angeles Times had an article on the decline of illegal immigration into the United States. It is unpopular to say this, but this is bad. There is lots of evidence that immigrants, including illegal immigrants, are a net positive to the economy. Here is a recent and typical research piece from the Federal Reserve Bank of San Francisco.
Some of the benefits of immigration are difficult for economists to quantify, including a high propensity to take risks, which can lead to greater innovation and entrepreneurship. Joel Kotkin has as recent piece on exactly this topic.
Most of the United States’ illegal immigration decline is due to a weak economy, but the article also states that California’s share of illegal immigration is down “to 23% from 42% in 1990.” This is a clear, and very disturbing, sign that California is in an endogenous secular decline.

The August employment report is out this morning. The United States unemployment rate rose slightly from 9.5 to 9.6 percent, driven more by labor force gains than employment losses. The non-farm job losses occurred in the public sector, the largest component of which was likely related to the Census wind-down. The bulk of the Census wind-down is probably over. The long-term unemployed subsided from 6.6 million to 6.2 million, a welcome improvement but 6.2 million long-term unemployed puts a damper on expected household expenditures.

Non-farm jobs fell 54 thousand, driven by a gain of 67 thousand private sector gains and 121 thousand public sector losses. These were close to what we projected last month of private sector gains of 80 thousand and public sector losses of 120 thousand.

Where do we go from here? Federal government job numbers should not change as much in the next couple of months as we are past the wind-up and wind-down of the Census effort. I would think that state and local government job gains would be weak in the coming months as weak revenue streams interact with balanced-budget requirements to imply slow hiring. Therefore we may see positive overall non-farm job growth next month, but not strongly positive, I would project about 30 thousand jobs.

The unemployment rate will likely not move much, but if it does it will likely be due to a change in labor force that dominates jobs. Calling next month’s labor force is difficult. It is clear that there are folks out there who need a job and are willing to enter the labor force to search for one. However, at the same time, this is not a good labor market in which to look for a job.

The FDIC’s quarterly banking profile, providing data for quarter 2, was released today.

The number of 2010 United States bank failures will likely exceed the 2009 failures, the FDIC reported. This was as I reported in this space back in May. Thus far this year there have been 118 bank closings, which compares to about 80 by the same time of year in 2009. The number of banks on the problem list is still rising. It is now at 829 banks.

Net charge-offs have improved a bit (from $53.5 billion in quarter 1 to $49 billion in quarter 2), but they remain very high.

Some banking indicators have improved, namely earnings and credit quality. Twenty percent of insured institutions lost money in quarter 2 compared with 29 percent in quarter 1. I suspect that earnings are supported in part by the Fed’s policy of paying interest on excess reserves, which I point out, for the umpteenth time, is a contractionary monetary policy. Credit quality has also improved. The massive pace of net charge-offs, $50 billion per quarter for the past 5 quarters, has thankfully led to this improvement in credit quality.

We have revised our prediction for the total number of bank failures this year. Our most recent prediction from June 22 was 160. Our current projection is 158, which is based on 40 more failures yet to occur this year or about ten more failures on average each month for the remainder of the year. The monthly profile will likely be declining with September and October greater than November and December. This compares with 140 failures in 2009.

• Barro, a very good economist, on unemployment, Summers, & Geithner: http://bit.ly/aCohgl Maybe time for them to go? #
• My mother parted my hair on the left. I started combing it straight back in the 70s. Today, the second and final change: I shaved it off. #

• "THIS Is What A Bear Market In Housing Looks Like" http://bit.ly/bFNFsf Glad to see he uses a percent ownership chart. #

I just finished California Crack Up by Joe Matthews and Mark Paul.  For me, the book was not quite fulfilling, and it took determination to read the final 30 pages or so.  There was some inconsistency.  The authors argue that Proposition 13 led to a concentration of power in Sacramento, but only a few pages later they claim Sacramento is powerless because of the initiative.  It is also slightly irritating that they assume that the legislation subsequent to Proposition 13 was inevitable.  In fact, many responses were possible, and it may be that the actual response was the worst possible.

The final 60 percent of the book is devoted to discussions of proposed political solutions.  These chapters are often in-depth expositions of various voting schemes, with sample ballots, most of which are designed to decrease extremism and increase representation.  These schemes are excessively complicated.  It seems to me that a simple, and large, increase in the number of legislative districts, combined with the authors’ proposed unicameral legislature would achieve the authors’ goals far more simply than would their proposals.

In spite of my quibbles, I recommend the book.  It will help many readers understand the political aspects of California’s predicament, and it provide enough proposed options to help propel the discussion of California’s future.

The Bureau of Economic Analysis released their second estimate of United States 2010 second quarter Gross Domestic Product today. The revised estimate of 1.6 percent real GDP growth is much lower than the initial estimate of 2.4 percent, but some commentators spoke of this release in favorable terms, as it was higher than pre-release estimates discussed in the financial press earlier in the week. It is not good news.

The largest contributing factors to the downward revision were a reduction in investment and an increase in import growth. Fixed investment growth fell by 380 basis points and inventory investment fell by more than $12 billion dollars, which is a reduction in positive contribution to GDP of four tenths of a percent. Import growth was revised up from 28.8 percent to 32.4 percent.

There is no good news in this press release. It confirms my suspicions that the economy does not yet have its own legs. Without government stimulus, this economy might not grow at all. This does not mean that we should re-instate the stimulus programs, as they have their own problems. Continued debt-funded consumption is simply unsustainable, and it does nothing for long-term growth. If the pace of reductions in growth from quarter one to quarter two continue in quarter three, real GDP growth will be negative.

Consider the real estate data released this week: Home sales were down dramatically due to the expiration of stimulus. Real estate markets cannot generate significant sales at current prices without assistance. Since perpetual subsidies are impossible, and certainly not desirable, prices will fall, or volumes will remain low.

The Federal Reserve continues to offer interest on excess reserves, implying a very weak banking sector as well as an ongoing contractionary monetary policy.

Within the last week and a half we have also seen data that indicates the manufacturing and technology sectors are slowing. It is not clear to me what will drive U.S. economic growth during the next year or so.

The July California jobs report shows continued weakness for the Golden State’s labor markets. Annualized month-on-month job growth declined 0.8 percent. Year-on-year job growth also declined 0.8 percent, and the unemployment rate held at 12.3 percent. The unemployment rate remains almost 300 basis points higher than the United States unemployment rate.

To some extent, as with the United States economy, the state’s jobs are cooling as temporary Census workers are returned back to the unemployed labor force. That is the Federal component of California public sector jobs. The state and local categories are likely to be weak for at least a year as municipal governments deal with meager tax receipts and balanced budget requirements.

The construction job sector, which was hit so hard in this recession, was up on the month, but down on the year. Construction job gains that were due to the American Recovery and Reinvestment Act will be offset by ongoing weakness in housing. Housing will be even weaker than usual in the next couple of months as the market comes back to reality now that the first-time home-buyer program is over.

We expect that the August California jobs report will be qualitatively similar to the July report. It is due out September 17.

Last winter I gave a forecast to the agents of a commercial real estate company.  The forecast was necessarily negative, but it was well received by the agents.  The company’s president was another matter.  He was downright angry.  I wasn’t optimistic enough.  A very similar vignette played itself out when I gave a forecast to the customers and potential customers of a regional bank.  After I finished, the bank’s president did his very best to argue that my forecast was wrong.

This happens all the time, and it sometimes costs my university money.  I’m pretty sure I won’t be talking to that real estate company or that bank again, even though subsequent events have confirmed my forecast.  I’m also regularly criticized by economic development people, city managers, tourism professionals, and real estate sales people, for either not being optimistic enough or for pointing out issues such as high marginal tax rates.

This confuses me.

It seems to me that when you ask an economist to speak, you would want the truth as they see it.  You are presumably looking for information to help make better decisions, and I don’t see how sugar coating things helps decision making at all.  I’m guessing that many people who made decisions last summer based on talk of green shoots and claims that a real estate recovery was imminent have a few regrets today, and a smaller net worth.  Optimism didn’t help these people.

That’s not to say I’m always right.  I’ve been wrong, and I’ll be wrong again.  That’s the nature of forecasting.  That’s the reason I always recommend that people listen to many economists, and then make their own decisions.  When doing that, it makes a lot of sense to pay particular attention to those who’s opinions might conflict with your interests or priors.

So, I have a few suggestions:  If you want a motivational speaker, get somebody with an inspiring life story.  If you want a sales person, get a sales person.  If you want to try and understand economic activity, get an economist.

It’s not everyday that Greg Mankiw and Paul Krugman agree.  When they do, it’s worth thinking about.  Here are their blog posts: Krugman & Mankiw.

The topic is a Taylor Rule, which is a method, proposed John Taylor, for determining what Fed Policy should be.  That is, what is the interest rate that the Fed should be maintaining?  There are several versions of the Taylor Rule, and the Fed looks at several of them, but they do not use them to set policy.  Why have 300 economists if you could replace them with a rule?

Krugman has been on a bit of a rampage about bond prices, and he uses the Taylor rule to propel his argument that bonds are not overpriced, that is they are not paying too little interest.  Mankiw just notes that Krugman is using a Taylor Rule that he, Mankiw, recommended.

I’m interested in the policy implications.  The Mankiw Taylor rule currently implies that the optimal Fed Fund Rate should be approximately -6.2 percent.   Of course, that’s impossible.  So, the Feds Fund Rate is approximately zero.

The inability to have a negative interest rate is dragging our economy down.  However, policy makers do have a tool available to them, one that would allow them to overcome the zero lower bound on interest rates.  A large investment tax credit would effectively create a negative interest rate for businesses considering investment and expansion, and this is what we need.

Consumers and governments, already overextended, cannot be the source of a robust recovery by continuing debt-fueled consumption.  In the end, only technological advances and investment can drive a long-lasting and vigorous recovery.  To do that, we need to create an effectively negative interest rate.  Without that, Krugman’s forecast of four years of zero interest rates is probably correct, and that implies lots of economic pain.