Excess reserves and quantitative easing

Why the Fed's latest plan won't have much impact

The Federal Reserve, in what had to be the most anticipated shift in monetary policy history, announced four weeks ago that it plans to buy an additional $600 billion in longer-term Treasury bonds.

Known as quantitative easing (QE) , which is defined as purchases of securities over and above what is needed to keep short term rates at zero, the new bond buys are part of the Fed’s own stimulus program that is designed, at least in theory, to boost the economy, create new jobs and prevent deflation from taking hold in the U.S. (was always just a very remote possibility in my view).



The first round of QE – about $1.8 trillion in bond buys – did help to stabilize the financial system in late 2008 and early 2009 when the implosion in credit markets threaten to send the U.S. and global economy into a worldwide depression.

The Fed did help to stave off a crippling depression, but failed to prevent the worst economic contraction in over 70 years, highlighting the limits of monetary policy.

Aversion to risk – the roadblock to recovery
Risking taking all but disappeared two years ago, as banks and just about everyone else sought safety and capital preservation. Hence, as the chart above reveals, excess reserves – defined as cash that is over and above what’s required to be held in the event of emergency customer needs – exploded.

And this aversion to risk among banks and consumers, which has played a major role in hampering the recovery, becomes clear when one sees that banks are holding nearly $1 trillion in excess reserves!

This time around, as the Fed gets set to prime the pump once again, things are a bit different.

Though the world’s largest economy and much of the developed world continue to slowly emerge from the recession, China and other emerging markets (EM) are experiencing robust growth.

With the Fed set to pump $600 billion in newly minted cash into the system - QE2 as it is commonly called, much of the new stimulus seems likely to find its way into the faster-growing economies, further propelling EM growth and risking new asset bubbles around the world.

Additionally, speculation in investments that have performed well in the last year may also be the beneficiary of this newly created cash. Think gold, oil, copper and a host of other raw materials.  That in turn is already stoking inflation in commodities.

Consequently, with the huge piles of cash still sitting on the sidelines, it seems very unlikely that new bond buys will have much of a direct and favorable impact on the U.S. economy.

Unless policymakers at the central bank are able to employ an exit strategy at just the right time, inflation could easily extend beyond commodities.

Consumer confidence hits highest level in five months

The Conference Board’s Consumer Confidence Index hit its highest level since June, rising 4.2 points in November to 54.1.

The improvement is welcome news to retailers heading into the holiday shopping season, suggesting that consumers won’t be so conservative when the search the malls for that perfect gift.

Many retailers are still offering up excellent bargains in order to attract recession-scarred shoppers, but the second-monthly increase in consumer confidence is signaling that some may go beyond sale items, which should help fatten profit margins.



Consumer confidence remains at a relatively low level and is still stuck in the narrow range it has been in for over a year.  That's not surprising given the summer slowdown and an unemployment rate that remains stubbornly above 9%.

However, the job market is slowly starting to improve, while weekly jobless claims fell to the lowest level since June 2008 last week.  Moreover, the Conference Board’s survey revealed that most consumers are feeling a little better about what’s happening to the labor market, which is aiding sentiment and appears set to support economic growth.

Falling new home sales contrasted by good news on jobless claims

New home sales plummeted a much larger-than-expected 8.1% in October to an annual rate of 283,000 units.  That bolstered the supply of homes from 7.9 months to 8.6 months.

However, the 8.6 months is based on the paltry number of sales.  With the actual supply just above 200,000, the number of homes on the market stands at the lowest reading since the late 1960s.

Still, the big drop in sales reflects the stiff headwinds the housing market continues to face in the wake of the expiration of the tax credits last spring.

Potential buyers are worried about the potential for further declines in prices, and the lack of any meaningful job creation is holding others back, offsetting record low mortgage rates.

In the meantime, weekly jobless claims tumbled  34,000 to 407,000 in the latest week, indicating that economic activity is accelerating and the job market is set to pick up.

Next week's data may be blurred by the Thanksgiving holiday, but the downward trend is definitely welcome news.

Philly Fed Index continues string of data showing improvement

The Philly Fed Index, which takes a look at manufacturing conditions in the mid-Atlantic region, is showing a noticeable improvement in economic activity, as the survey released by the Philadelphia Federal Reserve jumped from 1.0 in October to 22.5 in November, the best reading in a year.


(Source: Philadelphia Federal Reserve)

New orders moved back into positive territory, rising from –5.0 to 10.4, suggesting further gains in production, while shipments jumped for 1.5 points to 16.8.

The acceleration in activity also had favorable impact on hiring, which increased from 2.4 to 13.3.

However, rising demand around the globe, especially in China and other emerging markets, coupled with the re-introduction of quantitative easing by the Fed, is keeping upward pressure on raw material prices.

Prices paid rose 2.5 points to 34.0.  But the still-sluggish U.S. recovery is making it difficult to pass along higher commodity prices, as evidenced by a –2.1 reading on the prices received component.

Looking at the chart above, the summer soft patch has faded.  Just as important, the improvement in the Philly Fed signals that the weakness we saw in the more volatile and narrow Empire Manufacturing Index was very likely an aberration.

Expect the economy to gradually improve heading into the end of the year.

Jobless claims in process of establishing new range

Weekly initial jobless claims held below 440,000 for the third week in four, helping to confirm the recent downward trend.

Weekly claims did rise 2,000 to 439,000 in he latest week, but the 4-week moving average, which smooths out the volatility in the weekly data and is a better gauge of the market, fell 4,000 to 443,000.  Continuing claims dropped 48,000 to 4.3 million.

Jobless claims appear to be settling into a new range after hovering in a band between about 450,000 to 500,0000 for over a year.

The slight, downward trend not only suggests that that labor market may be slowly firming, but it is also an indication that economic activity is gradually picking up.  Though consumer confidence continues to languish, other data, such as retail sales, have been improving.

Nonetheless, any enthusiasm from the recent drop in jobless claims needs to be tempered by the fact that claims remain elevated and any improvement in the economy is likely to be modest.

Core CPI perilously close to zero

Fed action, recovery make deflation unlikely

The core CPI held steady for the third month in a row, and core prices slipped from 0.8% year-over-year in September to just 0.6%.

That might normally set off alarm bells at the Fed, but seasonal factors may have played a role in October’s number.



Additionally, the Fed’s latest round of quantitative easing has all but eliminated the slim chance that the U.S. will slip into deflation.

Still, at 0.6%, there is little in the way of retail inflation in the economy.

Detail available in my report at Examiner.

Tumbling multi-family starts hammer housing starts

A 47.5% drop in multi-family starts last month was responsible for a much larger-than-expected 11.7% decline in housing starts to a seasonally adjusted annual rate of 519,000.  Pull out the volatile multi-family category and housing starts were down 1.1% to 436,000 in October.

Building permits didn’t fare much better, rising 0.5% to an annual rate of 550,000, while single-family permits inched up 1% to 406,000.



Home builder confidence has been edging higher, but as the chart above reveals, single-family permits for new homes, which is a good forward-looking indicator of the industry, has been dragging along the bottom for several months.

New home sales make up less than 10% of the overall market, but residential construction feeds directly into GDP, while increased employment and the ripple effect throughout the construction industry would have a more indirect impact on GDP.

Builders must still contend with the heavy backlog of foreclosures of later model homes, and still high unemployment and depressed consumer sentiment continue to hamper the industry.

Intro of new car models pulls down core producer prices

Led by a 3.7% rise in energy prices, the Producer Price Index increased a modest 0.4% in October. The index rose 4.3% versus a year ago. 

But core prices, which remove the volatile food and energy category, tumbled 0.6% last month amid a steep drop in auto prices.  Core prices are up a modest but non-threatening 1.4% versus one year ago (see chart below).



Blame the steep drop last month on difficulties in accounting for seasonality that comes from the introduction of 2011 autos.  Looking back at October 2009, core prices also tumbled, indicating that the one month drop is very likely an aberration and not the beginning of a new trend.



Given recent strength in commodity prices that have been tied to stronger demand from overseas and QE2-fueled speculation, intermediate prices (see chart above) continue to steadily gain ground, while core goods (see chart below), which are especially sensitive to changes in demand, remain in a steady upward trend.



Demand in the U.S. economy remains sluggish, making it difficult to substantially raise prices, and wages, which are the largest expense for most businesses, are rising at a very gradual pace.  Consequently, retail inflation is likely to remain under control in the near term.

Housing Market Index shows slight improvement

The Housing Market Index, which gauges builder sentiment, increased one point to 16 in November, the second consecutive monthly gain.  A reading of 50 suggests that builders are neither confidence nor pessimistic.



"Though the gains have been incremental, the fact that builder confidence has improved over the past two months is encouraging," said NAHB Chairman Bob Jones, a home builder from Bloomfield Hills, Mich.

"Many builders are reporting that while the quantity of buyer traffic through their model homes has not improved dramatically, the quality of that traffic seems to be getting better – meaning that more people appear to be serious about buying in the near future. Builders remain very concerned, however, about the lack of available financing for new-home construction at a time when inventories of completed new homes are quite thin; after all, you can't sell what you can't build."

We are seeing incremental gains in builder confidence, though at current levels, sentiment remains very depressed.

With the exception of the artificial increase tied to the tax credits that expired at the end of April, overall builder confidence appears to have barely broken out of the downward trend that reestablished itself over a year ago.

Extraordinarily low mortgage rates may be helping at the margin, but low rates have not provided the support that the beleaguered housing market desperately needs. 

A winding down of foreclosures, which competes with new homes, rising consumer confidence, stabilization in home prices and a falling unemployment rate would go a long way in solving what ails the new home market.

Volatile Empire Index sinks into negative territory

The Empire Manufacturing Index, which is a narrow but early look at manufacturing and focuses only on New York state, fell 27 points to -11.1. The new orders index plummeted 37 points to -24.4, and the shipments index also fell below zero.


Surprisingly, given the sharp increases in many commodity prices, the prices paid index fell 8 points to 22.1, suggesting that the pace of price increases slowed in November. The prices received fell 11 points to -2.6—a sign of slight downward pressure on selling prices.

As already mentioned, this index tends to be fairly volatile, which can be seen by the chart above provided by the New York Fed.

The global economy has been improving and U.S. exports are gaining traction.  And most other U.S. economic indicators, including the six-month outlook that is part of this survey, continue to flash cautiously optimistic signs.

Unless confirmed by other data, this report is an outlier and should be ignored this month, in my opinion.

Gains in retail sales reflect improving economy

Led by a 5.0% rise in auto sales, advance retail sales increased an impressive 1.2% in October, well ahead of forecasts.  Pulling out the jump in autos, sales still managed to climb a respectable 0.4% in October, which comes on top of a small upward revision in September.

Looking at so-called core sales, which excludes the volatile auto category as well as gasoline station sales – so that the rise in gasoline prices is filtered out, sales still managed to increase 0.4%.

Despite lackluster consumer confidence, retail sales continue to slowly improve, as evidenced by both charts.   What may come as a surprise to many is the fact that sales ex-autos and core sales are actually above where they were when the recession began in December 2007. 

The inability to surpass the December 2007 level for overall sales, however, reflects the slow recovery in autos.



Still, the rise in core sales is a strong sign that the health and pace of the recovery is improving. Moreover, the rate of improvement has been accelerating (see chart above), which suggests that economic activity is also gradually picking up.



Despite the relatively favorable tone to today’s report, retailers won’t be shelving plans to offer steep discounts during the Christmas shopping season, but recent data suggest that some establishments may be pleasantly surprised, as consumers slowly re-engage during the upcoming and all-important holiday shopping season.

Eventually, and maybe sooner rather than later, a more even recovery should translate into more hiring (see Growth is the cure for high unemployment). 

Consumer sentiment stabilizes, inflation expectations rise

Preliminary results show that the University of Michigan’s consumer sentiment survey increased from 67.7 in October to 69.3 in November, just ahead of the Bloomberg estimate of 69.0. Notably, short-term inflation expectations jumped, but more about that in a moment.



Consumer sentiment, which took a beating when the already fragile and uneven recovery slowed during the summer, has stabilized and is beginning to inch higher amid a very modest acceleration in economy activity over the past couple of months.

The modest drop in weekly jobless claims is alleviating some of the anxiety about potential layoffs, while the private sector has created over 100,000 jobs per month in each of the last four months.

Still, the job creation remains below the 150,000 needed to bring down the unemployment rate, and without a noticeable pickup in the labor market, consumer confidence will likely remain depressed and hold back spending among the nation’s consumers.

Rising inflation expectations - keeping the genie in the bottle
So far just the talk in September and October that the Fed might initiate a new round of bond purchases, coupled with the green light the Fed gave in November, has reversed the drop in inflation expectations – at least over the short term.

According the the University of Michigan’s survey, consumers now anticipate that prices will rise 3.0% over the next 12 month, up from 2.7% last month and a paltry 2.2% in September.  Longer-term the 5-year outlook held steady at 2.8%.

Oil prices have jumped over the past two months, with the price approaching $90 per barrel, gold has soared above $1,400 per ounce, while the key industrial metal copper has returned to the highs reached in 2008.

It’s clear that rising demand around the world, especially in China and other emerging market economies, has supported prices.

But rising speculation created by the second round of quantitative easing that was just initiated by the Fed is producing a run up in commodity prices.  And consumers have not turned a blind eye to what’s going on, lifting their view as to what may happen to prices over the next year.

The Fed can do little to contain commodity inflation, given current monetary policy and global demand for raw materials. But it must remain vigilant in its efforts to anchor inflation expectations.

Import prices in modest upward trend

Led by a 3% rise in fuel costs, import prices increased 0.9% in October, while the price of imports less the cost of fuel rose a modest 0.3%, the third such rise in as many months.

Year-over-year, import prices are up 3.6%. Excluding fuel, prices are up a more reasonable 2.5% from a year ago.


(Source:BLS)

Delving into the data, October’s increase was skewed heavily by rising food and raw material costs as well as the increase in petroleum prices.

It comes a no surprise that higher raw material costs are impacting the Import Price Index, given that a number of commodity prices have jumped in recent weeks. 

Overseas growth, especially in China and emerging economies, are forcing prices higher, while the expectation in late summer and early fall that the Fed was ready to embark on a new round of quantitative easing – made official on November 3 - also fueled speculation in these commodities.

However, outside of oil and many commodities, prices are holding steady.

Capital goods – 23% of the index – was unchanged in October, while consumer goods – another 25% – fell 0.5%.  Year-over-year, prices are down 0.1% and 0.6%, respectively, indicating that nearly half of all imported goods, finished goods in this case, continued to be affected by the weak U.S. economy, which makes it difficult to boost prices.

If the dollar continues in its downward trend, we may eventually see small amounts of imported inflation, but much depends on how quickly demand ramps up in the U.S. economy.

Falling jobless claims signal expanding economy

Out a day early due to tomorrow’s Veteran’s Day holiday, weekly initial jobless claims fell a steep 24,000 in the latest week to 435,000, the second week in three that claims have fallen below the stagnant range they’ve been in for over year and below the Bloomberg estimate of 450,000.

The 4-week moving average dropped an impressive 10,000 to 446,000.



Continuing claims, which have been more difficult to interpret in this cycle because many are filing for emergency extensions that aren’t included in the figure, remain in a downward trend, dipping 86,000 to 4.3 million.

The 4.3 million does not include those on extended benefits. But the downward trend in the six-month standard payment does suggest that laid off workers, though still facing an uphill climb, may slowly be reaping the benefits of an improving economy.

Weekly claims remain elevated and obstacles are still in the path that might lead to a more vibrant expansion.  But activity does appear to be shifting into a higher gear, albeit slowly, and that should assist with job creation and put the economy on a firmer footing.

With the exception of a statistical quirk that caused claims to hit 428,000 in July, jobless claims are now at the lowest level in over two years and remain in the narrow downward trend that began in August when claims hit a weekly peak of 504,000.

Next week’s data may be skewed by tomorrow’s federal holiday, but the receding level of layoffs, combined with cautiously upbeat signals from most indicators, suggest employers are growing more confident.

With the election behind us and the unveiling of the Fed’s shift in monetary policy, both which are alleviating some of the uncertainty that’s been hampering growth, I am cautiously optimistic that we may finally be seeing the start of a long-awaited acceleration in economic activity.

Rising wholesale inventories no cause for alarm

Wholesale inventories jumped 1.5% in September, the twelfth rise in thirteen months, while sales grew a more modest 0.4%. 

The inventories-to-sales ratio, which measures how long it would take to liquidate stockpiles at the current sales pace, rose from 1.17 months in August to 1.18 in September, continuing the incremental streak of increases that began in April when the ratio stood at a very lean 1.13.



The out-sized gain in inventories at the end of the third quarter stands to benefit GDP, which will find support when next revision to the quarterly number is released later in the month.

But given that inventories remain lean in relation to sales, and the fact that about half the rise in stockpiles came from higher oil and food prices, the upward drift in the inventories-to-sales ratio should not be a cause for alarm.



Furthermore, sales remain in an upward though moderating trend, rising  11.9% from one year ago. 
The rise in the ISM Manufacturing Index for October, coupled with strength in key subcomponents, suggests a further acceleration in production in the near term.

Weekly hours worked suggest slowly improving labor market, earnings growth still sluggish

Average hourly earnings rose 1.7% in October versus one year ago, holding at the same pace for the third straight month (see chart 1).  Sluggish wage growth is not a surprise given the available supply of labor and the high level of job insecurity that many must grapple with.
 
It is helping to keep inflation in check since labor costs are the largest expense for most businesses.  Without pressure from rising wages, most companies are not being pressed to raise prices. Nor could most make all but the smallest price increases stick in the current environment.

However, the lack of any meaningful wage gains is a major factor holding back consumer spending.



Meanwhile, the small improvement in average weekly hours (see chart 2) and the year long upward trend suggests that the economy and labor market continue to slowly improve.



It’s not a surprise that hiring has lagged the rise in hours worked.  Employers aren't seeing much in they way of new business. And if sales are rising, they would rather have their current staff handle what comes through the door - at least until employers sense the recovery is on a firmer footing.

Growth is the cure for high unemployment

The economy created 151,000 jobs in October while August and September were revised upward by 110,000.  The unemployment rate held steady at 9.6%.


(click chart to enlarge)

As the economy has continued to expand, albeit at a modest pace, the private sector has added jobs for ten consecutive months, including at least 100,000 jobs each month over the last four months.

Still, it takes about 150,000 new jobs each month just to keep the unemployment rate from rising. Consequently, the recent upward trend, though encouraging, suggests that any celebration at this juncture would be premature.

Structural unemployment? No way!
I am not in the camp that believes we are facing structural unemployment, or job seekers that don’t have the required skills to fill open slots. So what's the solution – a faster economic recovery!


(click chart to enlarge)

The chart above goes back to 1981 and highlights the close correlation (0.83 for those who love stats) between economic activity and job growth, signaling that a faster economic recovery would very likely translate into increased hiring by businesses.

As already mentioned, the solution is simple.

But the formula that might create a faster recovery has been elusive and may remain elusive because an economy that is thrown into a recession by a financial crisis does not mend quickly.

Improving GDP aids productivity

The improvement in GDP from Q2 to Q3 helped to lift nonfarm productivity in Q3 by an annual rate of 1.9%, that’s up from a -1.8% in Q2.  The increase comes as output rose by 3.0% while hours were were up just 1.9%.


The improvement in productivity resulted in a 0.1% decline in unit labor costs, as productivity grew 1.9% while hourly compensation increased 1.8%.


As chart 1 from the BLS reveals, rising output, without the accompanying increase in hours worked (job growth) has had a very favorable impact on productivity growth.  This is normal during the early stages of an economic recovery since employers are reluctant to boost hiring amid worries that improving conditions may be temporary.

This time around, the uncertainty swirling around the economy has exacerbated the conditions that have led to a lack of employment growth.

Data give Fed room to maneuver
Rising productivity and the lack of meaningful wage gains have kept unit labor costs well under control – see chart 2.  The absence of higher unit labor costs, coupled with weak overall demand, has kept inflation very low, giving the Fed plenty of wiggle room to embark on its latest round of bond buys.

However, the Fed must carefully plan its eventual exit strategy.  Too soon of a withdrawal of the extra liquidity could send the economy into a tailspin.  Wait too long and the U.S. economy experiences high inflation.

Recent improvement in jobless claims stalls

Weekly initial jobless claims jumped by 20,000 last week to 457,000, about 15,000 above the forecast issued by Bloomberg.  The 4-week moving average increased 2,000 to 456,000, while continuing claims, which have been skewed by extended jobless benefits, fell 42,000 to 4.4 million.



Jobless claims can be difficult to interpret on a week by week basis because of the volatility in weekly numbers. But the 4-week moving average, which smooths away much of the volatility, rose last week, suggesting that recent improvement in claims may have come to an end, at least for now.

That means claims are still stuck in the narrow range they have been in for over a year.  I’ve harped on this in the past, but what’s needed is a pick up in economic activity.

The Fed just announced a new program to buy Treasury securities in the hopes of lowering longer-term interest rates and boosting activity.  However, monetary policy has lost much of its sting since short term rates are at zero.  In response to the Fed’s action, the dollar has been falling, commodity prices have been rising and stocks are up.

The Fed may not have a direct impact on the economy, but higher stock prices and the benefit to the economy in the form of the wealth effect may gradually boost growth. Risks, however, include higher inflation.

ISM survey of service sector shows small improvement

The Institute for Supply Management reported that its ISM Non-Manufacturing Index rose from 53.2 in September to 54.3 in October, suggesting that the broad-based service sector continues to expand at a modest pace.

A reading of 50 marks the line between expansion and contraction.



The latest survey did reveal that new orders increases, signaling further gains in the months to come. And employment inched ahead. Unlike manufacturing, however, which has been the bright spot in the fragile recovery, the service sector, which makes up the lion’s share of economic activity, has struggled.

Without a more robust recovery in services, any rise in jobs is likely to be limited, and most data, including today’s report, are signaling slow and steady gains.

Construction spending rises from depressed level

Construction spending increased 0.5% in September to $797.5 billion, as a rise in private residential construction offset a drop in nonresidential outlays.

As the chart reflects, the the decline in nonresidential has slowed modestly while residential construction has held in a narrow range for over a year and has been affected by the tax credits for homebuyers.

Excess housing inventories are being absorbed in the new home market, but foreclosures are still an obstacle to a more permanent recovery.

Falling income dampens consumer spending

Pressured by a drop in government transfer payments, personal income fell 0.1% in September, the first decline in over a year.  Falling income encouraged consumers to pullback on spending, which rose by just 0.2%.  Meanwhile, the savings rate fell from 5.6% in August to 5.3% in September.

Consumer spending makes up about 70% of total economic activity, and September’s small increase highlights what’s hampering a more vigorous recovery.

Moreover, the drop in income was not just limited to declining transfer payments from the government, wages were practically unchanged following modest increases in both July and August.  Without faster job creation, future income gains are likely to be muted.  And with consumers focused on building savings, increases in spending will probably be modest at best.

Elsewhere, the disinflationary trend resumed, with the core PCE Price Index holding steady.  Year-over-year, prices increased 1.2%, versus 1.3% in August.  The Fed has already deemed that inflation is too low, and September’s drop in the y/y rate is likely to reinforce an expected decision on Wednesday to embark on the next round of quantitative easing.

ISM survey reflects faster manufacturing growth

The Institute for Supply Management reported this morning that its closely-watched gauge of manufacturing showed an acceleration in activity last month.

The ISM Manufacturing Index increased from 54.4 in September to 56.9 in October, exceeding estimates. A reading above 50 suggests that manufacturing activity is expanding.



Manufacturing growth has slowed from its heady pace earlier in the year, but the best reading since May shows that the one bright spot in an otherwise dull economic recovery is not dimming.  Moreover, key subcomponents suggest further gains in the months to come.

New orders jumped 7.8 points to 58.9, and production grew 6.2 points to 62.7.  And survey respondents said they believe customer inventories are still too low, adding to the overall favorable tone.

In the absence of a vigorous recovery at home, an improving world economy has played a big role in lifting the fortunes of U.S. manufacturers. 

Recent weakness in the dollar could also help because it aids U.S. competitiveness.  However, rising raw material prices could cut into profit margins, as prices paid inched up to an uncomfortable 71.0.

Survey comments, reported by the ISM, included:

• "The dollar is weakening again, which is resulting in higher costs for our materials we purchase overseas. It is hurting our profit margins." (Transportation Equipment)
• "Business slowing down but still double digit over last year." (Chemical Products)
• "Currency continues to wreak havoc with commodity pricing." (Food, Beverage & Tobacco Products)
• "Customers remain cautious, placing orders at the last minute, making supply planning a challenge." (Machinery)
• "Our customer base — auto manufacturers — is expanding capacity and making major capital investments." (Fabricated Metal Products)

Despite the upbeat tone from today’s report, the broader economy continues to struggle.  Until consumer confidence improves and the uncertainty hanging over activity lifts, unemployment is likely to remain uncomfortably high.