Justin Wolfers, Bloomberg View and professor at the University of Michigan
: I like this chart because it's worth juxtaposing the stellar performance of the market with the steady drumbeat of criticism that President Obama has endured from the business community. Certainly smart investors bought stocks as if they believed that business conditions had improved sharply through Obama's tenure. It's hard to see any evidence here that his has been an anti-business presidency. Notice something else: Throughout 2012, which most of us remember as a terrible year for the economy -- think Europe, electoral uncertainty, Sandy, the fiscal cliff, and so on --this particular barometer of our economic health kept rising. But the insight this chart offers is deeper than a political talking point--it's an illustration of just how out-of-sync our political discourse can become from the underlying economic realities. The deeper point is a word of advice: It's always worth marking your ideas to market.
But there's been a simple, and unusual, formula for stocks the past few years: more inflation, more returns.
Matthew Yglesias, Slate:
There are no ironclad proofs in macroeconomics, but this chart above is, I think, the best evidence for the proposition that the economy continues to suffer a substantial shortfall in demand. The red line is the change in the interest rate premium for a regular 10-year treasury bond over an inflation protected 10-year treasury bond. In other words, it's the change in financial markets' expectation of inflation over a 10-year horizon. The blue line is the change in the value of the S&P 500. The point of the chart is that the two series are correlated--higher inflation expectations boosts share prices.
Here's another math question for you. Surging stocks plus sluggish growth equals ... what exactly? The answer is record-high corporate profits and a declining share of income going to workers.
Bonnie Kavoussi, Huffington Post
: Corporate executives and investors are reaping most of the economy's gains, as the job market stays weak. Labor's share of income hit a record low this year, while dividends continued to recover and corporate profits reached a record high. Companies squeezed their workers to boost their bottom line, knowing that their workers probably don't have anywhere better to go.
The past year was particularly profitable for housing -- at least compared to recent history, when builders went dormant.
Eddy Elfenbein, Crossing Wall Street
: This shows the Retail ETF (XRT) beating the S&P 500 this year, while the Homebuilders ETF (XHB) has absolutely creamed it. The move in the homies is much more dramatic since it's coming off a lower base. That's been the story this year: recovering housing slowing lifting consumers. In June, Walmart finally took out its high after 12.5 years
HOUSING, HOUSING, HOUSING
We don't want to jinx it ... but whatever, let's jinx it. Housing is back, admittedly from a very, very low base. That was the story of the U.S. economy in 2012, and it looks to be an even bigger story in 2013.
Matthew Zeitlin, Daily Beast
: Everyone knows housing is back. Instead of being a drag on the economy, it is now a tailwind and likely will be into 2013, and the story is all in the data. Although there are all sorts of metrics that track the health of the housing sector, the year-over-year change in monthly annualized housing starts is my favorite. Every month, the Census Bureau measures the number of housing structures that have started construction and then annualizes it -- projects it forward for the entire year. Over a years worth of this data, we can get a good idea of where the housing sector is going by these monthly readings. This chart shows the difference between every month's annualized rate of housing starts compared to the year before. What's important is that for the last 12 months , the average year-over-year jump has been 158,000. Even more encouragingly, since July, the numbers have started to grow quickly, indicating a housing sector whose growth is accelerating. In October of this year, the Census Bureau reported housing starts at an annualized rate of 894,000, a 264,000 increase or 42 percent increase from October, 2011. Housing. Is. Back.
Housing might be back, but what about the housing jobs? Not so much -- yet.
Conor Sen, Atlantic contributor
: This chart sums up the two biggest themes in the US economy in 2012: the housing recovery that kept the US from falling into recession, and the continued subdued recovery in the labor market. Despite housing starts rising 42% over the past year, there has been no gain in residential construction employment. This broader theme -- the ability of the economy to grow without workers participating -- is perhaps the biggest story of this era.
But here's something of a heretical question. How much did the big construction bust have to do with our economic bust? It's not as obvious as it seems.
The construction collapse didn't cause the Great Recession, but a construction bounce back could go a long way towards taking the "anemic" out of our anemic recovery. But if housing does accelerate in 2013, it doesn't look like it will be due to even lower borrowing costs, despite Ben Bernanke's best efforts. Banks are pocketing those right now.
Mike Konczal, Roosevelt Institute
: This is the difference between the mortgage interest rates in the primary market, or where lenders make mortgage loans, and the secondary market, where those loans turn into securitizations, as documented by the New York Fed
. This means that Wall Street is capturing a large part of the record low rates, courtesy of monetary policy, and not passing on that purchasing power to consumers, underwater or otherwise. They are doing this as a result of the way HARP was implemented, capacity constraints, and market power.
It's yet another example of how the poor policy response, wasted allocated money, and lack of real public options and actions in the collapsed housing market has kept the economy in check, while letting Wall Street take a huge cut of the upside. But it's also another example of how the administration hasn't successfully coordinated its powers to boost, rather than constrict, the power of monetary policy.
It's not just banks blunting the Fed's efforts to get the economy moving again. Household balance sheets are too. In other words, everybody's least favorite four-letter word -- debt -- is holding us back. But it might not be holding us back quite as much now.
Amir Sufi, professor at the University of Chicago
: One of the most important stories of 2012 was the strength of household spending on durable goods and the recovery of residential investment. I pay particular attention to these two variables given the excellent research by Edward Leamer showing their power in predicting economic activity going forward. The strength in auto purchases and residential investment is undoubtedly a positive sign. But the recovery comes with a very important caveat made clear in this chart: we are still nowhere near 2006 levels, especially in states that came into the recession with the highest household debt burdens. In high household leverage states, which among others include Arizona, California, Florida, and Nevada, auto sales remain 30% below their 2006 level, and residential investment remains 70% below its 2006 level. There are many ways to interpret the continued weakness in high household leverage states. One argument is that housing artificially inflated these economies in 2006, and we should never expect to see the same level of activity going forward. Another argument, which I prefer, is that crushing household debt burdens continue to hold back spending. Regardless of the interpretation of this chart, the economy remains extremely vulnerable to unforeseen shocks because it continues to carry with it the scars of the household debt binge.
How important is this story about housing, cars, and debt? Important enough that we're showing it to you again, with a bit more historical perspective.
Derek Thompson, The Atlantic
: Why is this recovery different from all other recoveries?
It might be the most important economic question of 2012 (and 2011, and 2010, and 2009 ... and 2013). I'd be lying if I said I could answer it in a graph. But I can get pretty close.
This chart tells a simple story: Home and car sales power recoveries. After the recessions in the 1970s, H&C sales accounted for about half of catch-up growth. After the recession of the early 1980s, they accounted for a third. Those recoveries were pretty fast and strong.
But after the recessions of the 1990s and 2000s, H&C sales accounted for only a sixth of growth. After the Great Recession, they have accounted for barely a tenth. General Post-War Law of Recoveries: If you're not selling houses and cars (especially houses), your recovery stinks. We're not selling houses. And our recovery stinks. That's why the rumblings in the housing market -- slightly rising prices, slightly rising construction on single- and, especially, multi-family homes -- are so important for 2013.
Okay, so we've explained why this recovery has been so rotten, but can anything explain the inexorable increase in ... bathrooms? Even the Great Recession couldn't stop this trend.
Kevin Roose, New York Magazine
: Totally mesmerizing. I had a full-length daydream about it when Joe Weisenthal tweeted it a while back. The dream involved a group of homebuilders in the year 2040 who were furiously trying to keep pace with the growth rate by putting bathrooms inside of other bathrooms.
THE YEAR OF THE CENTRAL BANKER
In an age of austerity, central bankers are kings. At least when it comes to trying to deliver us from stagnation. After some stops and starts, they were mostly up to the challenge in 2012.
Joe Weisenthal, Business Insider
: On June 26, with European peripheral borrowing costs surging again, Mario Draghi told a conference
in London that the ECB was prepared to do "whatever it takes" to save the Euro. Lots of Eurocrats over the years have promised to save the Eurozone, but none of them are central bankers, with an unlimited checkbook. Later in his comments, he hinted at exactly what he had in mind when he said, in regards to high yields, "These premia have to do, as I said, with default, with liquidity, but they also have to do more and more with convertibility, with the risk of convertibility. Now to the extent that these premia do not have to do with factors inherent to my counterparty -- they come into our mandate. They come within our remit." For the first time he was saying clearly that he had a mandate to reduce peripheral borrowing costs, and that he would use the ECB to do this. Peripheral borrowing costs in countries like Italy and Spain have been falling ever since, just on this implicit backing.
Ben Bernanke lacks the dramatic flair of Mario "Whatever It Takes" Draghi, but it's been no less a dramatic year at the Fed. Early in the year, the Fed got increasing criticism for not doing enough. Paul Krugman said it best when he said that Chairman Bernanke needed to listen to Professor Bernanke -- in other words, that he should stop ignoring his academic work on what central banks could do. Bernanke -- or was it the rest of the FOMC? -- listened. In September, the Fed announced open-ended bond-buying, and in December it unveiled a new framework. Mark Thoma, professor at the University of Oregon:
You can see the evolution of the Fed's thinking on monetary policy here. In particular, note that inflation approaches its long-run target from above. This shows the Fed's new found willingness to accept inflation in the short-run as it tries to help with the unemployment problem. Note also that the path for the federal funds rate implies it will stay lower for longer than the Taylor rule would imply. This departure from the Taylor rule, which attempts to stimulate the economy today by promising easier policy in the future, is another important innovation in monetary policy.
How can you tell if the Fed's unconventional policies are working? Check the chart below.
Ryan Avent, The Economist
: The chart I've spent the most time with this year shows the difference in yield on a garden-variety 5-year Treasury note and the 5-year "inflation-protected" Treasury security: a rough guide to the market's expected inflation over the next 5 years. I've used it as a gauge of the stance of US monetary policy, reflecting both the strength of headwinds blowing in from abroad and the Fed's reaction to them. The year's promising start (corresponding to higher inflation expectations) went into reverse in the spring thanks to a new crisis flare-up in Europe. Conditions improved over the summer thanks to the European Central Bank's heroics and the outlook soared in September as the Fed took bold new steps to address America's unemployment problem. The aftermath of that move has been disappointing, though whether because of fiscal-cliff jitters or the sense that the Fed hadn't gone far enough (or something else entirely) I can't say. But as the year draws to a close and the Fed keeps pushing, there are signs that the US economy is back on the right track.
David Keohane, FT Alphaville
: Every time you need a reminder of the yen's stubbornness, look at this. Reality does seem to be finally catching up with expectations, but there have been false dawns before
. Don't underestimate the yen's reliance, the ability of Japanese politicians to get it wrong, the influence of risk and the fact that QE alone, as it tends to act through equities rather than bonds in Japan and thus pulls in interest from abroad, won't be enough. Still though, all those Y90 estimates might be right. MIGHT.
Then again, maybe the Bank of Japan, and other central banks, really are just pushing on a string.
Cullen Roche, Pragmatic Capitalism
: As the Fed continues to embark on their various "stimulative" programs in 2012 I think it's once again wise to look at the one long-standing historical case study in highly expansionary Fed policy. Over the course of the last 20 years Japan's central bank, the Bank of Japan, has implemented various different forms of quantitative easing. But as the chart below via ING shows, these programs have failed to materially alter the stagnant economy or induce inflation.
I'd like to think the USA is different and that Fed policy will have a more beneficial impact here, but that reminds me of John Templeton's 4 most dangerous words in the world of investing -- "it's different this time". Is it really?
... BUT WE STILL HAVE PLENTY OF PROBLEMS
The age of crisis isn't quite over yet. The big problem at the root of all our other big problems, and the one central banks are trying to fix, is that too many people want to hold onto cash, or near-cash, money. That will make more sense if you look at the chart below.
David Beckworth, professor at Western Kentucky University
: Almost five years ago, households began adding more liquid assets to their portfolios. The accumulation of these money-like assets--checking and saving accounts, money market mutual funds, treasuries, etc.--meant less household spending and a slowdown in economic activity. It still remains an key obstacle to a robust recovery.
This is another one of those biggies that deserves a second chart, so here it is. It's easy to see why there's an excess demand for money -- there hasn't been enough of it lately. The private sector stopped making "money" when subprime went bust and securitization went into hibernation.
Cardiff Garcia, FT Alphaville
: The complex ways in which the concepts of shadow banking, safe assets, collateral, and rehypothecation affect our understanding of what counts as money
remain poorly understood. But these relationships appear to have played a meaningful role in both the US financial crisis and the pace of the recovery. The chart above comes from one of the best early efforts, conducted by strategists at Credit Suisse, to understand these various forces and their implications for fiscal and monetary policy.
Of course, our other BIG problem is the problem of long-term unemployment. There's startling new evidence that we increasingly have a bifurcated labor market: one for people who have been out of work for less than six months, and one for people who have been out of work longer. Brad DeLong, professor at the University of California-Berkeley
: We don't have a structural unemployment problem. We have a long-term unemployment problem. The healthy-looking chart on the left shows the Beveridge curve for people who have been unemployed less than six months; the ugly-looking one on the right shows it for people who have been out of work for longer than six months. We need more demand now.
Any discussion of our big problems -- are there any other discussions nowadays? -- isn't complete without a discussion of our increasingly stratified, and, more troublingly, less mobile society.
Jim Tankersley, Washington Post
: Forget Greece. Americans should be concerned that we're becoming more and more like England - at least in terms of income mobility.
There is growing evidence that from one American generation to the next, mobility is declining. It's getting harder, that is, to work your way into a higher income level than the one into which you were born. A son's adult income in the United States is about half dictated by how much his father made, a percentage that is nearly as high as in any country in wealth-by-birthright Europe, according to the Organization of Economic Cooperation and Development. That's a trend that not even the biggest of Anglophiles would welcome.
MEANWHILE, BUDGETS ...
Now, on to Pete Peterson's favorite topic -- deficits and debt!
Michael Linden, Center for American Progress
: 2012 was another year full of misleading claims about President Obama and the national debt. This chart shows clearly and concisely where all that debt came from, and - spoiler alert -- it wasn't from the stimulus!
So, where does the deficit come from? Is it a spending problem? A revenue problem? It's both, which is just another way of saying it's a GDP problem.
Binyamin Appelbaum, New York Times
: You can save a lot of time by looking at this chart rather than reading about the government's financial problems. It's a wonderful reminder that a) we usually run deficits, and that's OK but b) lately we've abandoned moderation and c) we have both a spending problem and a revenue problem.
But we don't have a spending problem when it comes to discretionary spending. That's headed to its lowest level since 1970, thanks to the 2011 debt ceiling deal.
Loren Adler, Bipartisan Policy Center
: As negotiations continue over fiscal policy, it's important to keep in mind that both domestic and defense discretionary spending have already been restrained. Last summer, the Budget Control Act of 2011 (BCA) capped annual discretionary spending through 2021 at levels similar to those recommended by the Bipartisan Policy Center's Domenici-Rivlin Task Force. Going forward, debt reduction efforts must shift focus to the true drivers of our debt - the rising costs of entitlements, predominantly Medicare, and insufficient revenues to fund them. Unfortunately, the pending sequester would address neither, and instead would force indiscriminate cuts to defense and domestic programs.
There's one group of people who aren't worried about our deficits. Fortunately, they're the only people who matter -- bond investors. Adjusted for inflation, they were offering us free money for 20 years. Until recently, they were actually paying us to borrow. Not a bad deal.
Dylan Matthews, Washington Post
: Ever since Obama was elected, DC has suddenly rediscovered a fervor for deficit reduction. But it's worth keeping in mind why deficits are concerning in the long-run. The fear is that if our debt load gets too big, investors will start demanding a "sovereign risk premium," to compensate them for the danger that we might default on our debts. That premium in turn hikes up interest payments -- worsening the budget situation still further -- and redirects investment that could go to private industry to government-issued securities.
But not only are investors not charging such a premium, they're doing the reverse. In recent months they've started paying interest rates on even 20 year debt that are actually negative, when adjusted for inflation. This means two things. One is that, unless the markets are wildly irrational in a way that even the most dogged Keynesian wouldn't expect, the US doesn't have a deficit problem for a good long while. Secondly, it means the US is stupid to be doing anything other than taking the free money investors are giving it to solve the jobs crisis, rebuild infrastructure, and pursue other national goals.
Deficits certainly aren't a problem in the short-run, but they will be over the long-run if we don't raise new revenues or trim entitlements -- or bring in more people -- to deal with the retirement of the Boomers.
Adam Ozimek, Modeled Behavior
: This shows the working age population, the retiree age population, and the ratio of workers to retirees. The projections out to 2050 show a growing problem: each worker has to support more retirees. This means more expensive government, and, if Stock and Watson are right, more jobless recoveries. And these are just two of the many reasons that our unwillingness to recognize that we need more immigrants is going to become increasingly costly.