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Thinking (and Understanding) Small

Padinha considers how to interpret the economy's smaller numbers. Also, monetizaton in Japan.

Is Three a Magic Number?



reports that retail sales rose 0.2% last month -- with or without autos.

This means (at least) three things.

The first is that the January

personal consumption expenditure

number to be released on March 1 is unlikely to reveal anything better than a 0.3% decrease. (Note that the retail sales report, unlike the PCE figure, does not include spending for services. Also note that the retail report typically captures only about 46.4% of what Dick and Jane spent during any given month.)

Why so grim? Auto sales. Manufacturers themselves reported that sales dropped 9.1% last month (the level of sales wasn't weak, but it came on the heels of an expansion-high December). But Commerce, after much black-box torture, says that sales actually


to the tune of 0.2%. This is ridiculous (even by's

accounting standards). Forget about it. The January PCE number will properly reflect last month's drop in auto sales, and -- even including spending increases outside of durables -- consumption of nondurables looks to rise 0.3% and service spending looks to rise at least 0.2% -- it will be hard pressed to turn in an increase.

That leads to the second thing. It is the three monthly PCE figures that comprise the quarterly consumption number that shows up in the

gross domestic product

report. PCE is now on track to rise roughly 2.9% during the first quarter. This marks a deceleration on the 4.4% fourth-quarter pace. But because consumption accounts for the bulk (68.2%) of GDP, even that increase will contribute two full percentage points to the first-quarter growth rate. And this fits nicely with the 3.2% increase to which the hours data in the January employment report pointed; recall that GDP surged 5.6% during the fourth quarter.

That leads to the third thing -- or question, rather. How now to interpret smaller numbers? Those holding out for more easing will take the numbers to mean the economy needs additional injections -- and that Fed nurses will come around to administer them. But policymakers do not yet feel that way. In the wake of a quarter during which GDP rose more than it has at any time since the second quarter of 1996, a number as big as 3.2% will not comfort a


chairman who has expressed concern about overly rapid growth. In fact, given that central bank estimates of trend GDP growth still sit tucked safely in their two-point-something testicle, it is more than a bit optimistic to assume that even growth rates as "low" as 2.0% will (all else being equal) produce a Code Blue.

Not Just Yet

Long-term interest rates in Japan sat as low as 0.69% back in October. They now stand at 2.0% -- and surged as high as 2.44% earlier this month. This increase stands to deliver yet another blow to an already staggering economy -- Japanese household spending was falling at a 0.6% rate as of December.

Against this backdrop come

calls for monetization, and the din of the chatter grows louder ahead of a

Bank of Japan

Policy Board meeting tomorrow.

Yet, as one source tells this column, participants who expect the board to announce that it will begin printing money are likely be disappointed. (It is even less likely, according to this same source, that the board will announce an inflation target, as has been rumored).

Why? Because history shows that monetization has a sorry track record. Because

Governor Hayami

has already splashed much cold water on the idea; he recently said, "It is beyond a central bank's power to control long-term interest rates." And most importantly, because "compromised independence" is a phrase no central banker ever wants to hear -- especially one whose bank has only recently become independent. Hayami knows well that responding to the government's (and

Lord Rubin's

) partiality to printing would prompt such charges.

What's most likely to come out of tomorrow's meeting? Not much. The aforementioned source reckons that the bank may well encourage the

Ministry of Finance

to shift the maturity mix of bond offerings already on the calendar from longer-terms issues to medium-term notes -- but likens the futility of this solution to balloon squeezing. Similarly, it's possible that the Bank will lower the overnight call rate a teensy bit more -- but it already stands at 0.26%.

The point here is that because markets seem to have priced in the monetization option, they will be disappointed if it isn't announced. This stands to further destabilize the


market next week. It also has the potential first to smack down dollar-yen -- on an unwind of the yen-bearish printing scenario -- and then to provide a great opportunity to buy it -- on thinking that the Bank will eventually have no choice but to print, and that it won't advertise the fact when it begins to.

Side Dish

Can the music guy who owns the cool house near one of the runs off the Rafferty Lift please write me? I misplaced your email address.

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