Matt Nolan

Capacity constraints and borrowing to spend

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Over at the Standard, Steve Pierson raises the fair point that borrowing to “spend” at the moment is likely to increase inflationary pressures – as capacity in the economy is limited. He uses this idea as a criticism of Nationals “borrow to fund infrastructure policy”.

As a purely demand story this makes sense – however we have to keep in mind where the spending is going, and what it is doing. If funds are being spent reducing capacity constraints by improving truly dilapidated infrastructure, then National is actually right that borrowing to spend on infrastructure will reduce inflationary pressures.
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Matt Nolan

June 08 Labour market: Part Two (Revenge of the hours worked)

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This follows from Part One.

Well, the unemployment rate rose to 3.9% – this was above market expectations, so the immediate feeling would be that the labour market is in trouble.

However, then you see the increase in employment and HOURS WORKED (the indicator I wanted to keep an eye on) and you realise “this employment data isn’t hot – but it is a definite improvement on what last quarter implied”.

So what am I talking about, and why am I talking in the third second person? (ht CPW) Well lets start with the first question, and lets look at the hours worked numbers.

Note: Other blogs on the numbers (Rates Blog) (The Hive) (The Standard) (Kiwiblog)
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Matt Nolan

Brian Fallow article on inflation

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Just had to say that Brian Fallow’s column on inflation in the NZ Herald was really good – I think everyone should read it.

Generally, economists seem to be running with a consensus about what inflation is and why it is bad (outisde of Berl at least – although they have toned down the anti-targeting rhetoric of late, and focused it more to a duel target mandate) – we currently differ insofar as we have different outlooks for NZ economic growth, and therefore different outlooks for where inflation will head in the current monetary policy setting.

There is a lot of economic information out today – however, this means I will be very busy.  As a result, don’t expect to much from me until later this afternoon 🙂

If anyone has any economics topics they would like covered at some point – mention them in the comments and I’ll see what I can do.

Matt Nolan

Real estate data and interpretation

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The July Barfoot and Thompson numbers are out according to Stuff. The Rates Blog discusses the numbers – something I’m not going to do here.

However, I always enjoy reading what real estate owned businesses have to say about the numbers. In the Stuff article we see that house sales increased by 73, and we are told that this

shows that vendors who need to sell are gradually adjusting to the market and lowering their expectations

Very good – so according to this sales are starting to pick up again. However, prices eased pretty sharply. In order to account for this we are told:

Mr Thompson says while prices clearly eased during the month, the average was skewed slightly by a package of 87 apartments going unconditional during that time and reducing the overall average

Just a second. There was a one-off sale of apartments. Often when there is a sudden “one-off” event like this, people will look past it in order to get an idea of underlying activity in the market. As a result, the trend in sales would be 87 lower than the reported number – or below the June result. This does not suggest that house sales are recovering!

If it wasn’t for the fact that Barefoot and Thompson wanted to make the fall in prices not sound too bad we never would have heard of this one off increase in sales – and so we might have also taken the wrong conclusion from the data.

Ultimately they have to make a choice, was there an increase in sales and a sharp fall in prices, or a moderate easing in prices but no improvement in the sales picture – they can’t cut the data both ways 🙂

Update:  The commentator at the real estate blog discusses how the apartment block influenced the median sales price.

Matt Nolan

Australiasian Reserve Banks: Do they know something we don’t?

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Well to be honest, the Reserve Banks know a lot of things I don’t – but it appears that maybe they have some access to information that I am not aware of.

Yesterday, the Reserve Bank of Australia turned even more dovish than it had been earlier – spelling out the fact that it was going to start cutting interest rates soon (here). Similarly, the RBNZ began cutting from July 24th in a statement that seemed to indicate that interest rates were going to be progressively cut over the rest of 2008 (here).

Now both Bank’s admitted that inflationary pressures were rife – however, both banks have also presumed that wage pressures and inflation expectations will moderate. This is the kicker – price and wage claims must moderate, and both Bank’s appear to have a reasonable amount of confidence that they will.
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Matt Nolan

Debt for infrastructure – and the issue is?

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There has been a lot of talk (here, here, here, here, here, and here) about the a potential National government taking on debt for infrastructural investment. Now I’ve got no problem with this, and Roger J Kerr says here we could view it as an intergenerational issue – borrowing allows us the stagger the cost of the capital over time in the same way that the benefits from the capital investment occur over time.

Furthermore, borrowing allows us to fund expenditure that provides economic growth, without having to introduce taxes that limit this growth (although note that future taxes would have to be higher to pay for the borrowing – so we only have a net benefit if growth stemming from the capital investment exceeds the cost of the eventual tax increase!).

However, there are a couple of issue that I hope any government will remember before going into debt to build up infrastructure.

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