On Thursday, the Federal Reserve issued its weekly H.4.1 report, which provides details of the Fed's balance sheet. Once upon a time, this was one of the least interesting of the government's many releases of data. These days, it's become one of the most exciting.

The essence of the Fed's balance sheet used to be quite simple. The Fed's primary operations would consist of either buying outstanding Treasury securities or issuing loans to banks through its discount window. It paid for these transactions by creating credits in accounts that banks hold with the Federal Reserve, known as reserve deposits. Banks can turn those reserves into green cash any time they desire, so the process is sometimes loosely summarized as saying that the Fed pays for the Treasury bills it buys or loans it extends by "printing money".

No time to post much, so I'll just pass along an interesting question and brief answer from the Econbrowser mail room.

A reader writes:

Updates on some of the series we regularly follow, and they're not good.

On Thursday the Federal Reserve Board announced that its index of industrial production fell by 2.8% in the month of September (yes, as in 33.6% at an annual rate). That's the biggest monthly decline in the index since January 1975. To put it in perspective, UCLA Professor Ed Leamer suggested last August that a 6-month decline of more than 3% should be characterized as a recession. That had been the one holdout among Leamer's four indicators in suggesting that the economic situation was still not so bad. But according to Leamer's criterion, the September drop in industrial production almost counts as a recession all by itself.

That was the topic of a talk by Stanford Professor Frank Wolak at the UCSD Economics Roundtable on Tuesday.

Among the initiatives on the November 4 ballot for California voters is Proposition 7, which would require all utilities to obtain 20% of their power from renewable energy by 2010, with this fraction increasing to 40% by 2020 and 50% by 2025. Investor-owned (as opposed to government-owned) California utilities are already subject under existing law to the 20% goal for 2010 and 33% by 2020. Frank noted that the investor-owned utilities have so far made little progress toward that goal.

There's plenty of gloom out there if you're hungry for more. But I wanted to pass along a couple of developments this week that give me some hope.

First, via Rebecca Wilder and Arnold Kling, the Federal Reserve's H8 statistical release shows a big increase in real estate loans held by large commercial banks during the last week of September. There's likely a mechanical explanation in terms of some reallocation of security ownership during the recent turmoil. But if there has also been an increase of direct lending, that would be a promising development.

IMF research economist Prakash Loungani reports some statistics on the extent to which housing price declines are being seen worldwide.

Source: Loungani (2008)

The house price decline during 2008 has actually been more modest in the U.S. than in countries such as Denmark, New Zealand, the U.K., and Spain, though the price decline has been going on for much longer in the U.S. and it is the cumulative decline from the price peak that is the key determinant of the extent of mortgage defaults. Loungani notes from previous international and U.S. regional experience that the bigger the real estate price decline, the more severe the economic downturn we might expect.

I was astonished when I heard that the Fed was contemplating increasing the Term Auction Facility to $900 billion. I wanted to take another look at the ever-changing balance sheet of the Fed to see how logistically Bernanke might be able to perform such a feat.

The one power that the Fed unquestionably possesses is the ability to create money. It traditionally did so by buying Treasury securities from the public, crediting the sellers' banks with newly created Federal Reserve deposits (a "liability" from the Fed's point of view), and adding the securities purchased to the Fed's asset holdings. Those newly created Federal Reserve deposits are essentially electronic credits that the banks could use to receive delivery of green cash from the Federal Reserve.

UCLA Professor Ed Leamer recently proposed four criteria for determining whether the economy is in recession, and concluded at the time of his study (two months ago) that the U.S. had not yet crossed that threshold. But this week's data might cause him to change his mind.

Professor Leamer observed that recessions are usually characterized by a 6-month drop in civilian employment of more than 0.4% as measured by the BLS household survey. At the time he wrote his paper, the U.S. fell just short of that standard. But the BLS reported on Friday that this measure fell by 222,000 jobs in September, putting the 6-month change at -0.5%. On the basis of this number, Leamer would now have to change his call.

Here I relate some interesting new research on how to update economic forecasts with incoming daily data and the latest assessment of where things stand in Europe.

I've spent the last week visiting the European Central Bank in Frankfurt and Eurostat in Luxembourg. Europe is becoming a very exciting area for business cycle research, with a lot of bright and energetic people studying the nature of the new economic interactions among the European nations. One of the most interesting papers at the Eurostat conference I attended was by Gabriel Perez-Quiros, my former student who is now a well-known researcher at the Bank of Spain, and Maximo Camacho, one of Gabriel's former students (which makes Maximo my grandchild, Gabriel says) who is now at the University of Murcia.

U.S. auto sales have been dismal for most of this year. And they just took a turn for the worse.

The light truck category, which includes the once-trendy SUVs, continued to lead the retreat, with seasonally unadjusted September sales of light trucks manufactured in North America down 22% from August and down 31% from September 2007.

Calculated Risk observes that we already know the values for a significant chunk of 2008:Q3 GDP. And it doesn't look good.

CR notes that personal consumption expenditures, the biggest single item in GDP, is released by the BEA monthly, so we now know two of the three monthly values that will make up this item for 2008:Q3 GDP. The graph below shows the inference you'd make using the first two months' release of PCE to estimate the actual quarterly consumption component of GDP. The inference from two months alone looks pretty useful, though as Simon van Norden reminds us, it would be interesting to construct this graph using real-time vintages for the two-month estimates rather than the revised data shown here.

One measure that is being used to summarize the strain in financial markets is the TED spread. This is calculated as the gap between 3-month LIBOR (an average of interest rates offered in the London interbank market for 3-month dollar-denominated loans) and the 3-month Treasury bill rate. The size of this gap presumably reflects some sort of risk or liquidity premium. I was interested to break the TED spread down into identifiable components to try to get a better understanding of what may be responsible for its recent behavior.

The TED spread over the last 5 years is plotted below; for a longer time series see Bespoke Investment Group. Historically the spread typically stayed under 50 basis points. However, it's usually been above 100 basis points since the credit events of August 2007, and reached 300 several times during the last two weeks.

The "final" values for 2008:Q2 GDP released by the Bureau of Economic Analysis on Friday were more disappointing than the earlier estimates. Still, the 2.8% annual growth rate for real GDP that we're now told characterized the second quarter doesn't sound like a recession. Or does it?

As we teach in any introductory macroeconomics course, it is possible to think of GDP in two different ways. One is as the dollar value of all final sales of goods and services produced by factors of production located within the United States. The second is as the dollar value of all the income generated by that production. The two measures are equal to each other by definition. But in practice, one can try to calculate GDP either using production data or using income data. If we obtain the production and income numbers from different sources, we're certain to end up with different numbers for what is supposed to be the nation's GDP. The difference between "gross domestic product" (GDP) and "gross domestic income" (GDI) is simply reported by the BEA as a "statistical discrepancy."

Here's how it was reported, for example, in the Wall Street Journal:

Reaction to the Wall Street bailout and frenzied last-minute trading in the oil market sent crude prices soaring by more than $16 a barrel, the biggest one-day jump ever.

Let me begin with the point on which I am in complete agreement with Treasury Secretary Henry Paulson and Federal Reserve Chair Ben Bernanke-- it is hard to overstate just how scary this week's developments in financial markets could be.

Prior to the establishment of the Federal Reserve in 1913, the United States would periodically experience events that are often referred to as "financial panics." Rick Mishkin noted that these usually occurred after a recession began and a major financial institution had failed, and were characterized by a sharp increase in the spread between the interest rate paid by higher risk versus lower risk borrowers.

As Hurricane Ike took over the Gulf of Mexico, I watched with unusual interest, since I had been scheduled to fly through Houston to give a lecture in Baton Rouge on Friday. We had to cancel that visit to LSU, which left me to contemplate the consequences of Hurricane Ike for oil and gas markets from the comfort of my warm, snug home in San Diego.

Hurricane Ike on Sept. 12. Source: Drudge.

Essentially all of the 1.3 million barrels per day of U.S. crude oil production from the Gulf of Mexico (which accounts for about a quarter of total U.S. production) has been shut in as a result of the storm. When the same thing happened 3 years ago with Hurricane Katrina, the effects turned out to be surprisingly long-lived. Damage to offshore rigs proved costly to repair, and in some cases due to field depletion the platforms were abandoned rather than repaired. We will have to wait for an assessment of how extensive the damage will be this time around. The absence of a significant spike up in oil prices at the end of last week suggests that many market participants were not so worried this time.

Is there anything good to say about Friday's report from the Bureau of Labor Statistics that the U.S. unemployment rate jumped up to 6.1% while seasonally adjusted nonfarm payrolls declined by another 84,000 jobs? Well, here's one thing. It gives us some real clarity as to just where the economy stands.

Civilian unemployment rate, from FRED, with NBER recessions as shaded regions.

Sure looks like a recession when you inspect a graph the unemployment rate, doesn't it? And it also looks like a recession from the perspective of a model of unemployment dynamics that I published in 2005. If you use that model to analyze the latest unemployment numbers, you'd calculate the current probability of being in a recession at 95%.

August auto sales were less dismal than July. But don't uncork the champagne quite yet.

The New York Times reports:

Maybe it's time to try something new. And maybe it's already starting.

Last week the New York Times reported:

Barack Obama gave a fine speech at the Democratic National Convention on Thursday. But I'm troubled by what I see as its underlying economic philosophy.

As I listened to the speech by Barack Obama accepting the nomination of the Democratic Party for the U.S. presidency, I felt I was listening to a very gifted orator. I also thought I heard a cash register go ca-ching every time he finished a sentence: