Monday, December 21, 2015

Personal Recollections of the Underground Railroad by Mark Campbell McMaken

I found this written account by Mark Campbell McMaken. Mark McMaken was the younger brother of my great-great-great grandfather Joseph Hamilton McMaken (born 1787). This branch of the McMaken family lived primarily in Southern Ohio and Eastern Indiana. Some of them were active in the anti-slavery movement, including Mark McMaken. I found the following document on the web site of the Ohio Historical Society. The documents have since been taken down, but I preserved screen shots. In this document, written by Mark McMaken himself, recounts some episodes in which he and other members of the community worked to free slaves who had crossed the river from Kentucky. (Warning: the "n word" is used in this 1895 document. In spite of his egalitarian sentiments, McMaken was not PC by modern standards.)

Note: The place names appear to all still be current except "Port Union" which is now better known as West Chester Township.  The area used to be known as Union Township, but before that, was known as "McMaken's Bridge." 

Wednesday, December 16, 2015

Fed Slightly Raises Target Fed Funds Rate After Seven Years

The Fed today announced that it will increase the target Federal Funds rate from 0.00-0.25 percent up to 0.25-0.5 percent.

The last time the target rate exceeded 0.25 percent was in November of 2008 when the higher bound of the target rate was 1 percent. In December of 2008, the Fed lowered the target rate to 0.00-0.25 and it has stayed there ever since. 

Back in September, when we thought that the Fed might raise rates, The Economist noted that "The last time the Federal Reserve raised its benchmark interest rate, there was no one to tweet about it," because Twitter did not yet exist. Moreover, Zero Hedge ran a somewhat amusing article reminding us of what the world was like the last time the target rate was above 0.25. Remember Nelly Furtado? George W. Bush was still president back then, too. 

The sheer length of the Fed's flatlining has made it seem that a move to a 0.5 target rate is an immense change. Here's what the huge change looks like: 

The fact that this is being labeled such a large change underscores just how fragile the current economic "recovery" is. Ever since 2009, the Fed has been telling us that its monetary easing will help the economy regain its footing, and then momentum will take over from there. We're still waiting.

Median incomes are falling, workforce participation is down, and housing is becoming more unaffordable. But, the fed may have figured out that if the economy's going to be lackluster anyway, the Fed might as well try to regain some of its credibility by letting rates inch up ever so slightly.

It could be worse, though.  We could be living under the European Central Bank which is doubling down on negative interest rates.  Nevertheless, Europe's future may soon be our future, since, as many Fed critics are predicting, the increased in the Fed Funds rate is really just a temporary measure. We may see the economy stall even more in the face of higher rates, at which point the Fed will quickly use the opportunity to return rates to zero or even negative.

At this point anything could happen. We live in such an abnormal economic world right now, it's hard to guess much of anything.  After all, it wasn't all that long ago that the Federal Funds Rate was between four and six percent.

On the other hand, I'm an old man of 38 years, so I can remember the ancient world of the 1990s, albeit I was a teenager at the time.  Some people working at the Fed, though, don't know, in practice, what it even means to raise rates.

Tuesday, December 15, 2015

Homicide Rates in Mexico, by Region

As I noted here, and here, I'm not a big fan of speaking about demographics or trends at the national level when we're talking about a large country with large regional differences. It's nonsensical to  speak about "the United States" as if the 318 million people in the US lived under similar conditions and were affected by identical demographic trends.

The same is true of Mexico, which has nearly 120 million people and displays very large regional differences, especially from north to south. The south is densely populated and tends to be poorer. The north is more sparsely populated and tends to be richer. Culturally, there are big differences. Chiapas, for example is mostly populated by people descended from Indians, while Chihuahua has a slight majority of  "whites" descended largely from migrants of German, Spanish, and French origins (among others).

So, given that Mexico has a reputation for a remarkably high murder rate right now, I thought we might look more closely at this indicator. I mentioned this metric a bit in this post, but thanks to this data from the OECD, we can list by region the homicide rate in each Mexican state (from 2013 data).

Mapped by state, this is what it looks like:

Here's a map to help you identify the name of each state:

The biggest factor in the homicide rate in Mexico right now is the War on Drugs. It's a huge factor, so it's not a coincidence that the states that border the USA are some of the worst, in terms of homicide. Other high-murder states, such as Guerrero and Sinaloa are also notable for being connected to the drug trade. Gone for now are the days of seemingly endless crowds of happy tourists in Acapulco in Guerrero state.

Most Mexicans, however, live in states where the homicide rate is relatively low. Moreover, places where you're likely to vacation, such as Baja California Sur (i.e., Cabo), Vercruz, Jalisco (i.e., Guadalajara), and the Yucatan region are relatively low-crime areas.  Indeed, most of southern Mexico has a homicide rate of around 10 or less per 100,000. If that seems like a lot, remember that the US homicide rate in the 70s and 80s was around 9.5 per 100,000, and it was over 10 in many US states at the time. Even as late as 1995, the US overall homicide rate was over 8 per 100,000. Somehow, we lived through it. This isn't to say that homicide is not a serious problem in Mexico. It's just important to have perspective.

Where people live in Mexico:

And just as a final note, it's interesting to see that drug murders often come along with higher GDP per capita. Are the two related? In some ways yes, because the same factors behind the international trade that makes northern Mexico wealthier are also important factors to international drug runners: 

Unemployment Rates in Colorado Metro Areas Keep Falling

Through October, the overall trend in unemployment rates for Colorado metros remain downward.

For October 2015, the unemployment rate for each metro area in Colorado (according to the Colorado Department of Labor and Employment) was:

Boulder: 2.7%
Colorado Spr:3.9%
Denver: 3.1%
Fort Collins: 2.8%
Grand Junction:
Greeley: 3.2%

This numbers are remarkable low, and I discourage comparisons with unemployment rates in the current cycle to unemployment rates of past cycles. Declines in work force participation are a significant factor in determining the unemployment rate. Nevertheless, these rates are quite helpful; in comparing geographical areas.

Historically, the best job markets have been in Boulder, Ft. Collins and Denver. Greeley has recently joined that group thanks to oil jobs:

Unemployment, as expected, is a bit higher in the lower part of the state. Pueblo rather consistently has the highest unemployment rate among Colorado metros, but all areas have seen big drops since 2010.

Compared nationally, Colorado enjoys a very low unemployment rate, as can be seen in this data from the US Bureau of Labor Statistics:
Nationwide for October 2015, the unemployment rate was 4.8 percent, compared to 3.3 percent for Colorado. Colorado's unemployment rate situation has increasingly improved relative to the nation overall over the past year. In other words, the job market in Colorado is getting better faster than in the US overall. This likely has implications for the overall demand for real estate here.

All data used in this article is not seasonally adjusted.

Saturday, December 12, 2015

Apartment Vacancy Rate Rises to Five Percent in Metro Denver

According to the Multifamily Vacancy survey from the AAMD, the vacancy rate for the third quarter in metro Denver was 5 percent. That's up from 3.9 percent during the third quarter of 2014. And it's also up from 4.5 percent during the second quarter of this year.

It's unlikely that this is a seasonal softening, as the third quarter tends to be one of the tightest quarters of the year in terms of rental housing. We can expect further softening during the fourth and first quarters coming up.

Five percent is what the report's original author, Gordon Von Stroh, used to call "the equilibirum rate," since it's the rate at which you wouldn't say that the market is either tight or soft. This is a change from most quarters in the last two years, though. One would certainly say that a vacancy rate of 3.5 percent is indeed a tight market, as was clearly the case last year. There does appear to be real softening in the market right now, though:

Note that the third quarter's rate of 5 percent was the highest rate recorded in six quarters. 

I like to compare the vacancy rate to the unemployment rate as well, since there has historically been a connection between the two. Naturally, a hot job market tends to lead to a tight rental market since more people can afford to go out and found a new rental household without the need for roommates. Thus, more households are created and more units demanded. We can see the two curves move together in most cases. 

 Thanks to sustained population increases in the metro Denver area over the past decade, the rental market tightened after 2010 even in the face of a very lackluster job market. As the unemployment rate declined, the vacancy rate moved quickly toward some of the lowest rates ever recorded.

The metro Denver vacancy rate rarely falls below 4 percent. Whether or not the current tight market can be sustained remains to be seen, however. As we'll see in other data, median household income growth in Denver has not been robust in recent years, and this will tend to put a damper on multifamily demand as people take on roommates or share quarters with other families. 

Metro Denver's Inflation-Adjusted Rents Hit An All-time high This Year

New third-quarter average rent data came out for metro Denver last month. The average rent hit a new all-time high during the third quarter of 2015. During the third quarter, the average rent in metro Denver, according to the Apartment Association of Metro Denver's vacancy survey, was $1,291. That's up from the third-quarter 2014 average rent of $1,145:

Year-over-year, the third quarter saw one of the largest growth rates ever recorded. During the third Q of 2015, the YOY change was 12.7 percent. That's down slightly from the second quarter's all-time highest growth rate of 13.2 percent:

Although this graph only goes back to 1988, we'd still find that recent YOY growth is the highest ever, even if we go back to the earliest data recorded by this survey (which was in 1982). We can safely say that we're now experiencing the highest levels of rent growth seen in thirty years. 

But what if we adjust for inflation? Is the rent really at an all time high? The answer is yes.  In this graph, I've adjusted the average rent data so that everything is in constant 2015 dollars: 

When we adjust for inflation, we find that real rents were fairly high even by today's standard during 2000 and 2001. Back in the 4th quarter of 2000, real rents had peaked at $1,085. They would not reach that level again until the 4th Q of 2013. Since then, rents have been regularly reaching new all-time highs. 

Also note that rents were going down in real terms between 2001 and 2009. Those were the days when, in real terms, your rent actually went down when you renewed your lease. For now, renters are facing some of the biggest rent growth ever, both in nominal terms and in real terms. 

This data is for multifamily rentals only. "Multifamily" means structures with more than four units. 

Friday, December 11, 2015

It's Not Only a Supply Issue: Oil Price Falls to 35 Dollars per Barrel

According to the LA Times, the US crude slumped to $35 per barrel this week, "the lowest price since early 2009."

Up through last week, the West Texas Intermediate Crude price had fallen to 40 dollars per barrel, putting it close to the sorts of prices we saw during the dark days of the last recession. If this week's trends keep up, we'll be headed back to ten-year lows in oil prices:

Source: US Energy Information Administration

A year ago, the oil price was more than 30 dollars per barrel higher, and came in around 70 dollars, although by that point, the price had already tumbled from a price of 105 dollars that had been reached during mid-2014.

The 2014 prices were not as high as they seemed, given the effects of price inflation. If we make a  mild adjustment based on the official CPI data, we find that 2014's peak levels had really only been matching the prices we saw during the early 80s. Those prices are indeed near historical highs, but the decline since then has not taken us down to historically cheap gas in real terms (in 2015 dollars):

Source: US energy Information Administration and Bureau of Labor Statistics
Even with today's relatively cheap gas, we're still looking at real prices that are above the good ol' days of the 1990s.

Nevertheless, prices are no longer what they need to be to sustain much of the shale oil industry. As Retuers reported yesterday:

Drained by a 17-month crude rout, some U.S. shale oil companies are merely hanging on for life as oil prices lurch further away from levels that allow them to profitably drill new wells and bring in enough cash to keep them in business. 
The slump has created dozens of oil and gas "zombies," a term lawyers and restructuring advisers use to describe companies that have just enough money to pay interest on mountains of debt, but not enough to drill enough new wells to replace older ones that are drying out.
Meanwhile, CNBC reports that the energy sector became the biggest "job cutter of 2015." It was only 18 months ago that we were still hearing about how oil jobs — and especially shale oil jobs — were going to save us from any serious downturn in jobs.

Moreover, much of the nation's economic growth was coming from a handful of oil-rich states, including Texas, Oklahoma, and Colorado, among other places. It's not a coincidence that the BEA reports the highest GDP growth in 2014 in California, Texas, Oklahoma, North Dakota, and a few other Western States.

Those areas may now be in trouble, and national GDP will suffer the more oil rigs go dark. Texas has been the salvation of the nation's overall jobs-gains totals in recent years, as Texas's size and oil-based wealth has made the national numbers look much better than they would have without Texas. But the statisticians at the BEA and BLS may not be able to rely on Texas much longer. The Arkansas Democrat-Gazette reports:
Unemployment in Texas may surpass the national rate in the next year for the first time since 2006, according to Prestige Economics, JPMorgan Chase and ING Bank. Texas is already experiencing a "rapid deceleration" in job growth to just a third of what it was last year following a slump in oil prices, said the Wood Mackenzie consultancy group.
Perhaps in an attempt to put a silver lining on the matter, many continue to cling to the belief that the collapse in oil prices is driven almost entirely by excess supply. In other words, we're being told that there's still plenty of good hearty demand out there, it's just that we extracted too much oil.

If it's just a problem of too much oil supply, the thinking goes, then there's not all that much to worry about because people will take all the money they saved on gasoline or fuel and spend it somewhere else right away.

However, The Wall Street Journal admitted yesterday that this doesn't seem to be happening. The subtitle reads: "Experts expected the drop in gasoline and oil prices would jolt spending by U.S. consumers and businesses. It hasn’t turned out that way."
It hasn't worked out that way because demand is much weaker than the "experts" are willing to admit. As I noted here earlier today, median income and wages are lackluster at best, and there's little reason to believe that consumers are just itching at the chance to spend away any money they might save at the gas pump.

Like the owners of oil rigs, consumers have plenty of debt to deal with. Or they may be realizing that their incomes aren't going to go up as much as they hoped. Or they may just be uncomfortable enough about the future that they're saving a little more than usual.

In other words, some individual households may be doing the right thing. By saving and cutting back on spending, they're imposing a temporary "recession" and temporary drop in their standard of living on themselves at the household level to make up for some past malinvestments. This would especially be true of people employed in energy-related fields or other bubble industries. They made a mistake by investing their time, labor, and energy into an industry that was really based on malinvestments stemming from what David Stockman calls the Fed-money-fueled Wall Street Casino. When enough households do this, the overall economy will go into recession which — if left alone — would repair the economy.  The Fed, however, will do everything in its power to keep that from happening. If the energy sector will no longer do the trick, the Fed will find some other sector to flood with money, just as the housing bubble replaced the dot-com bubble beginning in 2002.

Yes, all things being equal, falling oil prices would free up funds for other types of spending. But when there are larger economic headwinds at work, a little freed-up cash in one place may not be enough to overcome the global malaise. The WSJ article gives a perfect example of the complexity of markets right now:

Beef ‘O’ Brady’s, a restaurant chain based in Tampa, Fla., saw sales rise late last year thanks to cheaper gas, said Chief Executive Chris Elliott. But the momentum waned, especially in the factory-heavy Midwest. “The restaurant industry seems to be slowing,” he said, though lower prices for beef and other ingredients have “helped firm up” profit margins.
It may be too little too late.

As Mark Thornton noted a year ago, large drops in the oil price tend to accompany economic downturns. They don't cause the downturns of course, but there's good reason to be extra cautious before declaring that a dropping oil price is going to be followed by a boon to new consumer spending. It rarely happens that way. In fact, a big drop in the oil price is often followed by some very bad economic news. 

Wednesday, December 2, 2015

World Bank: Extreme Poverty Worldwide Has Plummeted

The World Bank recently announced that the world had reached a new milestone. Extreme poverty, the Bank explained, is likely to dip below 10 percent worldwide for the first time in 2015.

Extreme poverty, according to the WB, is a situation in which a person lives on an income of less than $1.90 per day. In other words, we're talking about real, grinding poverty, and not a lifestyle at the poverty line in America where the poor have cell phones and air conditioning. In other words, this measure of poverty isn't a relative measure, as is often used by the UN for measures such as its child poverty report.

According to the Bank:
The World Bank projects that global poverty will have fallen from 902 million people or 12.8 per cent of the global population in 2012 to 702 million people, or 9.6 per cent of the global population, this year.

We must note that richest countries of the world have already eradicated extreme poverty. There are not people who live on $1.90 in the US, Canada, Australia, or Western Europe. These countries simply do not contain more than a negligible number of people who live in mud huts, walk miles a day to get clean water, and have no access to modern health care. Even in Eastern Europe, where Soviet-style socialism persisted into the 1990s, we rarely find a population with more than 1 percent of the population that endured extreme poverty levels.

So, we look to Latin America, Asia, and Africa to find the populations that continue to endure under conditions of extreme poverty.

All data is from the World Bank and reflects data collected over the twenty years from 1992 to 2012, the last year that data is published. Worldwide during that period, extreme poverty fell from 34.7 percent to 12.7 percent.

Latin America is the least poor of the regions outside the wealthy west and Eastern Europe. The largest countries in Latin America have all been well below the worldwide rates for extreme poverty over the past twenty years:

In addition to seeing that Latin America has lower poverty in general than the world overall, we also can note that there has been substantial improvement in the twenty-year period. In Mexico during this period, extreme poverty dropped from 9.7 percent to 2.7 percent. Extreme poverty dropped even further in Brazil where the rate fell from 20.8 percent to 4.9 percent. In Columbia, the drop was smaller, but remained on the right track, with extreme poverty dropping from 8 percent to 6 percent.

Conditions are considerably worse in southern Asia and southeast Asia where extreme poverty rates exceeding 40 percent can be found. Nevertheless, in these cases we also find profound improvement over the 20 year period. In China, for example, extreme poverty fell from 57 percent to 11 percent. In Indonesia, the rate fell from 57 percent to 15 percent. Some of the least amount of progress was found in Bangladesh.  But even , there, extreme poverty dropped by 20 percentage points from 63 percent to 43 percent. 

The worst situation, however, was found in Africa where overall extreme poverty rates were higher, and the least amount of improvement was seen.

Among the largest countries in Africa, we find that extreme poverty continues to plague large portions of the population, although significant improvement was experienced in South Africa and Ethiopia. In Ethiopia, from 1992 to 2012, extreme poverty dropped from 67 percent to 33 percent, and it fell from 32 percent to 17 percent in South Africa. 

Tuesday, December 1, 2015

Federal spending, state by state

The Pew Charitable trusts recently released new data up through 2013 on federal spending in the states.

If we look at federal spending as a proportion of each state's overall GDP, we find that the recipients are not exactly evenly distributed:

Source: Pew Charitable Trusts  (based on data from 2004–2013)

This is all federal spending, so these totals are a combination of military spending, social welfare programs such as Medicare, and ordinary civilian federal spending, including civilian research facilities and other programs funded by federal grants.

These are proportional numbers, so they are a function of both the amount of federal spending as well as the overall size of GDP. So, in California, for example, which receives immense amounts of government spending, is nevertheless a state where federal spending is offset by a very large private sector. In a more rural state with few major private industries, such as New Mexico, the state shows up as being highly reliant on federal spending.

By this measure, the state most reliant on federal spending is Mississippi where federal spending is equal to 32 percent of the state's GDP. The state least reliant on federal spending is Wyoming where federal spending is equal to 11 percent of the state's GDP:

Source: Pew Charitable Trusts  (based on data from 2004–2013)

The above measure gives us a sense of how much federal spending is taking place relative to overall economic activity. But, it tells us little about how much the feds are spending in each state relative to the tax revenue being produced in each state.

To discover that, we need to compare federal spending to tax collections from each state. So, I took gross tax collection by state, and then subtracted refund totals. I then compared the "net" collections to Pew's total federal spending data in each state. (The tax data used was 2013 data.) We can then measure the result in terms of dollars spend in each state per dollar in tax revenue collected. States that have a value of less than a dollar in the map below receive less than a dollar in federal spending for every dollar in taxes paid from that state. So, for example, Ohio receives 91 cents in federal spending for every dollar collected in taxes from Ohio:

I've divided this graph up into "net tax payer states," "break-even states" and "net tax receiver" states. The lightest shade of blue are states that, by far, pay in more than they receive back, such as New Jersey and Minnesota. The next lightest shade of blue are states that are more or less "break even" in the sense that spending and tax collections hover somewhat around a 1-for-1 relationship. The darker blue states are states that receive considerably more in federal spending than they pay in taxes.
Here are all states, including values:

Naturally, these values aren't spread evenly within the states themselves, either. Areas that are more rural and reliant on agriculture will tend to be net tax receiver areas both because farmers and ranchers receive a lot of government subsidies, and also because agricultural work tends to have lower productivity than urban work.

Urban areas, in contrast, produce most of the tax revenue, so highly urbanized states will tend to more often be "break even" or "net tax payer" states.

Other Considerations

One thing that must not be ignored is the fact that the US government spends more than it takes in nationwide. During 2013, for example, the federal government spent a dollar for every 80 cents it took in via taxes.

Nationwide, the tax-spending ratio is not one dollar, but it about $1.20. So, states that are getting around $1.20 back for every dollar extracted in taxes are really just at the national average.
This is being made possible by old-fashioned deficit spending and also by monetization of the debt which the Federal Reserve facilitates by expanding the money supply. Once interest rates rise or the international value of the dollar begins to fall significantly, this sort of overspending will no longer be possible, and many states will find themselves in dire straits. (States that are "net tax payer" or "break even" states will adjust the best to any significant disruptions in federal spending.)