Saturday, December 27, 2014
The guys at Powerline Blog amaze me. Never has a group of individuals been so consistently wrong on the economy, yet continue to write about it as though they have something of substance to say. For example, John Hinderaker was one of the many conservatives who argued that QE and government stimulus would lead to soaring interest rates and rampant inflation. As he wrote in 2009:
I’ve assumed that the profligate spending and borrowing planned by the Democrats in Congress and the White House will run up a debt that we and our children just can’t pay, so, in the time-honored tradition of banana republics, the Obama administration or its successors will inflate our currency and repay its creditors (China, mostly) in devalued dollars. Thus, I’ve been buying gold. I’ve assumed that an actual default by the United States government is unthinkable.
See also here and here. Hinderaker was not alone. A year later, a group of conservative economists signed a letter to the Federal Reserve arguing that QE would lead to inflation, largely using the same logic as Hinderaker. Earlier this year, Bloomberg did an analysis of this prediction and determined that if you had followed their advice, you would have lost $1 trillion dollars. And, now you know why I now refer to Hinderaker as “Trillion Dollar Loss.” His economic incompetence can be quantified with a very large and quite unflattering number that shows the extremely negative ramifications of buying into his analysis.
But, Hinderaker is not alone at Powerline. He shares his blog with several others who, like him, are just as incompetent at basic economic analysis. And their collective posts from 2014 highlight the amazing breadth and depth of economic ignorance. This is not a case two people debating finer points of a particular discipline. Instead, it's a group of people who literally have absolutely not one clue about what they're talking about, yet continuing to do so.
The First Quarter GDP Contraction
US real GDP contracted in the 1Q at a 2.1% annualized pace. Most economists attributed this to the inclement weather. For example, the March Beige Book noted:
Reports from most of the twelve Federal Reserve Districts indicated that economic conditions continued to expand from January to early February. Eight Districts reported improved levels of activity, but in most cases the increases were characterized as modest to moderate. New York and Philadelphia experienced a slight decline in activity, which was mostly attributed to the unusually severe weather experienced in those regions. Growth slowed in Chicago, and Kansas City reported that conditions remained stable during the reporting period. The outlook among most Districts remained optimistic.
CNN reported that Janet Yellen made the same observation:
"Part of that softness may reflect adverse weather conditions. But at this point it's difficult to discern exactly how much," Yellen told the Senate Banking Committee in a hearing Thursday. (Ironically, the hearing, originally scheduled for two weeks ago, had been postponed due to a snow storm in Washington.)
Steve Hatward tried to show his capabilities in this post, in which he argued that we're in for "Japan style problems."
And according to John "Trillion Dollar Loss" Hinderaker:
This morning, as Steve noted, the Commerce Department revised its estimate of 1st quarter GDP to show a shocking 2.9% annualized decline. The White House tried to spin the awful numbers, arguing that the drop was largely accounted for by cold weather
He then quoted from Senator Jeff Sessions press release, which stated:
The American economy is the victim of a tragic collision with reality. We are living out the truth that no amount of political rhetoric, professional spin, or expedient demagoguery can create a single job, produce a dime of prosperity, or boost opportunity for a single working person.
However, a simple look at two publicly available indicators would have revealed just how wrong Hinderaker's and Hayward's analysis was. These numbers are the leading economic indicators and coincident economic indicators, both available for free from the conference board. Both numbers are composites of a broad number of economic statistics that are universally accepted as, well, leading and coincident indicators. Neither of this numbers showed any signs of a contraction before the number was released, indicating that weather was most likely the primary reason for the contraction. And, considering the US economy has been hitting its stride in the two subsequent quarters, it's a good bet that bad weather was in fact the main reason for the 1Q contraction.
The part time work issue.
On several occasions, the boys at Powerline have commented that all the job growth has been part-time. Paul Mirengoff observed the following on July 15: “In reality, full time jobs decreased by 523,000 according to the Bureau of Labor Statistics — a shocking number that is obscured, but hardly offset, by the addition of 800,000 part time jobs.” John Hinderaker made the same comment on November 2 with this chart:
Looking at that, you’d probably think that part time work was simply taking over!
But if you look at the historical data, you will notice a distinct trend:
Part time work always advances in the early part of a recovery as shown in the chart above. And – just to add insult to injury – under Bush II, the economy had the exact same problem: part-time work rose after the recession was over, and then stayed high for a bit longer then usual. Funny, but I seem to remember that Hinderaker though that economy was just "awesome! Awesome I tell you." Yet when the exact same things happens under a Democratic president, it's a sign of extreme economic mismanagement.
So, the whole part-time canard from Powerline can be explained by going to the St. Louis Federal Reserve’s FRED page and simply pulling up two charts which clearly explains that what is happening is normal. You’d think that the guys at Powerline -- all of whom hold advanced degrees -- would know how to do that.
The stock market is really just a giant bubble.
I love this argument for several reasons. Ever since the Fed engaged in QE, there has been a continual chorus of detractors arguing it was only inflating the stock market, not creating real and meaningful growth. But, what else should the Fed have done? Nothing? That is an absurd statement on its face. And, you can rest assured that if the Fed had taken that tact, the same people would have been complaining about the Fed doing nothing.
The best explanation and defense of the Fed's policy came from Steve Poloz, head of Canada's Central Bank:
Let’s walk through a thought experiment together. What would our world look like today if, instead of keeping interest rates low to stimulate the economy, both Canada and the United States had moved their policy rates back up to neutral at the beginning of 2011? We estimate that the neutral rate of interest today is between 3 and 4 per cent for Canada, and use a similar number for the United States, so our thought experiment is to raise rates to about 3 1/2 per cent in both countries.
Such a move would of course allow those headwinds we talked about earlier to blow us backwards. We estimate that, under this hypothetical scenario the output gap in Canada would have been around 5 1/2 per cent today, instead of around 1 per cent. Unemployment would have been around 2 percentage points higher than it is today, and core inflation would be running somewhere between 0 and 1 per cent.
Most of the impact would be felt in reduced housing construction and renovation and auto production, as these were the sectors that responded to the policies put in place after the crisis. Moreover, these estimates do not capture the range of confidence effects that would permeate the rest of the economy under such a difficult scenario, so the story could even be worse.
From this monetary policy-maker’s perspective, that’s an unattractive alternative. Our primary job is to pursue our 2 per cent inflation target, with a degree of flexibility around the time horizon of its achievement; that flexibility permits the Bank to give due consideration to financial stability risks, provided they do not threaten macroeconomic performance.
Put more bluntly, not doing anything would have done, at minimum, just as much damage and potentially more by forcing the economy to work against itself. This is, at best, a very poor policy option.
On several occasions the boys at Powerline have argued that QE has led to a stock market bubble (see here and here). The most obvious question to ask here is, have all of the individual authors making this argument taken their profits and placed their gains into money market accounts? Or, are they still participating in the market against their own advice?
However, let's also note that corporate profits -- the mother's milk of stock market gains -- are also at record highs which supports the market's current valuation. Scott Grannis noted as much on
December 5 of this year:
Today's revision to Q3/13 GDP gives us our first look at corporate profits for the quarter, and they just keep on growing. Nominal after-tax profits are at a new all-time high, and have risen almost 9% in the past year. This is very impressive no matter how you look at it.
Record high corporate profits indicate that not only is there justification for the stock market rally, but that the underlying economy is in fact growing. In fact, one could also argue the Fed's ZIRP policy has in fact been successful based on this economic metric alone.
But, at bare minimum, the corporate profits picture indicates that the "we're in a stock market bubble caused by the Fed" is -- like most other Powerline observations -- a pure canard.
Continually comparing this expansion to the 1981 expansion
Conservative commentators and economists have continually compared the economic results of this expansion to that which occurred after 1981. They've done this for several reasons, the first of which is the 1981 recovery was far closer to a "v" recovery where the post-recession expansion picks up speed quickly. The exact opposite happened post 2008. Secondly, in using 1981 for comparison, conservatives get to invoke the name "Reagan," and, in doing so, allowing conservatives to get a nice case of warm fuzzies.
Powerline has made this comparison on multiple occasions (see here, here, and here). However, this comparison couldn't be more inappropriate -- a fact which is more than obvious to anyone who knows economic history and has a basic understanding of economics. Reagan's recession was caused by the Fed raising interest rates to slow inflation. That means that, once inflation was moving lower, the Fed could simply lower interest rates to stimulate growth. On the expansion side of a Fed-induced recession is faster growth.
But this expansion followed the popping of an asset bubble, which leads to a balance sheet recession, which can be explained thusly:
A balance sheet recession is a type of economic recession that occurs when high levels of private sector debt cause individuals or companies to collectively focus on saving (i.e., paying down debt) rather than spending or investing, causing economic growth to slow or decline. The term is attributed to economist Richard Koo and is related to the debt deflation concept described by economist Irving Fisher. Recent examples include Japan's recession that began in 1990 and the U.S. recession of 2007-2009.
As a result, on the other side of a balance sheet recession, consumers and businesses are diverting more of their income to debt repayment than consumption. This leads to far slower growth, which is exactly what we've seen.
And, as noted above, to anyone who knows economics as claimed by the boys at Powerline, this should be obvious.
Continually focusing on the labor force participation rate
Conservatives discovered a new economic statistic starting about 2008: the labor force participation rate, which shows the percentage of the population that is actually "participating" in the labor force. This number started to increase around 1970 as two demographic changes started to occur: women entering the labor force and the baby boomers hitting their prime earning years. Those two trends are apparent in this long term chart:
The boys at Powerline have blamed the post 2008 drop on this recovery in several posts (see here and here). What's notably absent from their posts is any citation to the myriad reports done on this topic since 2008. Thankfully, Invictus over at the Big Picture Blog has done the work the boys at Powerline should have done. Here's the general economic consensus about the drop in the LPR:
Of note is the fact that the drop in the labor force participation rate was just 0.6 percentage point during the 2007–2009 economic downturn whereas, between 2009 and 2012, since the end of the recession, the rate declined by another 1.7 percentage points. A major factor responsible for this downward pressure on the overall labor force participation rate is the aging of the baby-boom generation.
If Powerline were in fact as adept at economic analysis as they claimed, this should have been obvious.
The sum total of the above points is clear: Powerline's economic analysis has been completely wrong on numerous occasions throughout the entire 2014 year. And their degree of ineptness is severe. For example, they couldn't even go to the Fred system to draw a graph comparing part-time employment to total employment; they couldn't do a simple google search of LPR research, nor could they be bothered to understand what a balance sheet recession is even though that's the exact economic situation we're in. This degree of ineptitude is beyond a minor disagreement but instead rises to the level of abject incompetence.
Put more directly, no one at Powerline has any clue about economics. Period.
Friday, December 26, 2014
- by New Deal democrat
One year ago I had a significant difference of opinion from Bill McBride a/k/a Calculated Risk, and just about the nicest guy in the econoblogosphere, about the direction of the housing market.
Based mainly on interest rates, I wrote that:
Based primarily on demographics, Bill said that:
I expect growth for new home sales and housing starts in the 20% range in 2014 compared to 2013. That would still make 2014 the tenth weakest year on record for housing starts (behind 2008 through 2012 and few other recession lows). So I expect further growth in 2015 too.Given our very different forecasts, we made a charitable wager. If permits, starts, or new home sales were down -100,000 YoY in any month, Bill had to make a charitable donation. If any of those metrics were up by 20% YoY for even one month, I had to make a charitable donation.
Here's what actually happened in the first 11 months of 2014 compared with 2013:
- Permits averaged 990,000 in 2013. So far in 2014 the have averaged 1,020,000, for a gain of 3%. Their worst YoY loss was -8000 in January. Their biggest YoY% gain was +8% in March and July.
- Starts averaged 930,000 in 2013. So far in 2014 they have averaged 990,000, for a gain of 6%. Their worst YoY decline was -77,000 last month. Their best gain was just over 20% YoY in April.
- Sales of single family homes averaged 431,000 in 2013. So far in 2014 they have averaged 433,000, for a gain of less than 1%. Their worst YoY decline was -60,000 in March. Their best gain was +15% YoY in August.
Since starts had a 20% YoY gain in April, I made good on our wager by donating to Tanta's memorial fund. In the larger picture, however, neither one of our forecasts came to pass. Permits were never down YoY anywhere near -100,000, and the 2014 average for starts and sales were nowhere near +20%. I have gained a healthy respect for the importance of demographics, and if I read Bill correctly, he has begun to highlight the important effects of even a small change in interest rates.
I'll have a more detailed look at permits, starts, and sales for November up at XE.com later today.
I suspect our 2015 forecasts for housing will be much closer, but who knows, maybe there will be room for another wager!
Wednesday, December 24, 2014
- by New Deal democrat
The next time some Doomer tells you that everything is still awful, and that the American people "on Main Street" know it, feel free to point them to this post.
Or, just post this graph, from that article:
More Americans now feel positive about the economy than negative.
Should we thank Saudi Claus?
Tuesday, December 23, 2014
- by New Deal democrat
Over at Daily Kos, Meteor Blades has trotted out the canard that I made a big mistake in forecasting the kind of recovery we would have from the Great Recession. So this post will serve to put that canard to bed.
Meteor Blades and I have not been on polite terms since I wrote a diary back in my DK days in May 2009, on that year's April jobs report, in which I said:
The BLS reported this morning that in April the economy shed another 539,000 jobs. The U3 unemployment rate also increased to 8.9%. This is a .4% increase from March, and is what I expected. This is one of those cases where "less awful" actually ought to give rise to some hope.Meteor Blades commented that:
One month may be the start of a new trend, but it is not of itself a new trend.He followed that up with a front page post on that blog entitled One Month of Slightly Less Terrible Jobless News does not make a Trend, in which he wrote:
Since the Bureau of Labor Statistics announced its monthly payroll survey numbers Friday, there’s been quite a bit of happy-talk – including from some progressives – about how we’re just around the corner from the end of the "Great Recession." ….Is the intent of the happy-talkers to use fact that unemployment is getting worse at a better rate to chill the widespread rage over what has - during the past three decades - brought us to the economic precipice? …. Beats me.
…. Only the foolish can put a smiley face on Friday’s jobless report.
Since then, Meteor Blades has steadfastly denied that his insult was aimed at either Bonddad or myself, but now that you can see the quotes side-by-side, the truth is pretty obvious.
Since, as it turned out, neither of us were foolish in the slightest, the canard that we predicted a V shaped jobs recovery is one of those things that the Doomers occasionally trot out to defend their abysmal record. So let's set my record straight.
One of the things I am not afraid of doing is challenging the conventional wisdom, where there is data to support such a challenge. In 2009, the conventional wisdom was that even after the recession officially ended, there would be a long period of increased unemployment and continuing job losses. Since there was a contrary case to be made, I thought it was worth writing about, and did so in 3 parts.
Here's the intro and conclusion from the first entry:
Recently data has caused me to question the certainty of such a continuing "jobs recession." While I'm not saying it will happen, there is a surprisingly decent case that contrary to the accepted wisdom, the recovery from this recession may not be "jobless" at all, but particularly in its earlier portion may feature quite robust job growth. There are several different reasons supporting such an outcome
.... the recession is nearly over, but suggests that at least in the next few months, there could be actual job growth, more robustly than almost anyone suspects.
Notice that I challenged the "certainty" of a jobless recovery, and even highlighted the conclusion's "could be" in italics.
And I repeated the qualification that I was only "making a case," not embracing a forecast, in part 2 and part 3 as well. In the conclusion to part 2, I even posited a test to see if there would be a V-shaped jobs recovery or not, writing:
one way to tell if we [are] going to have a V-shaped recovery or not [is] "monthly manufacturing hours worked:" an average rise of only 0.1 hours per month means a lackluster increase in plant use, over 0.15 supports a V-shaped recovery.
And here again is the into and conclusion in the last installment:
In this 3 part series, I am examining the mounting evidence that contrary to the accepted wisdom that we will have a "jobless recovery" where GDP turns up anemically but unemployment stubbornly rises, the recovery from this recession might not be "jobless" at all, but particularly in its earlier portion may feature quite robust job growth as the GDP starts to grow probably right now
Finally, let me repeat that I am not saying that we will have a "V"-shaped jobs recovery -- only that a surprisingly substantial case can be made that it might indeed happen.
This is self-explanatory. A "case can be made" for an alternative almost everybody seems to be dismissing, not "I forecast" X. I explicitly said to the contrary, and even noted a way to test the hypothesis. In fact, a couple of months later, I highlighted the contrary argument for a jobless recovery:
Since I recently hit the Rec list arguing that The Recovery may not be Jobless for Long, an admittedly minority view, it's only fair that I present the contrary conventional wisdom, which was ably set forth last week by Dr. David Altig
So what happened? As to employment, that bottomed 8 months after the end of the 1991 recession, 22 months after the end of the 2001 recession, and 8 months after the 2008-09 recression. The unemployment rate shows a more stark contrast, peaking 15 months after the 1991 recession, 20 months after the 2001 recession, but only 4 months after the end of the 2008-09 recession.
And by March 2010, I was able to write that there was a Bifurcated Recovery:
industry and associated economic metrics show a strong V-shaped recovery, the best since 1983, then once we look at that part of the economy most closely associated with average American consumers, another picture emerges entirely.
I recommend that you check out the graphs in that last post. The recovery from the 2008-09 recession was indeed V-shaped for things associated with industry and production. It also was relatively V-shaped for real GDP, and also, in the earlier part of the recovery, in terms of aggregate hours worked, which made up over half of their 22-month loss of 10% (to October 2009) over the next 26 months. For the number of jobs created, and certainly for wages, it was not.
Where I have made forecasts and been wrong, I have had no problem saying so. In fact, earlier this year my forecast of a YoY decline of 100,000 housing permits didn't pan out. What did I do? I wrote about it publicly, and examined the data to see what might help my forecast - in the case of housing this year, the fact that the huge Millennial generation created upward pressure on household formation, and their presence was a boon to housing data just as that of the Boomer generation was half a century ago.
But the alleged forecast of a V shaped recovery isn't one of them, because that's explicitly what it was not.
- by New Deal democrat
No graphs this time, but I wanted to point out that there were a slew of reports this morning confirming that low gas prices (and maybe an asssist from consistent stronger job growth, and maybe a little bit of wage growth), have caused a real surge in consumer sentiment and behavior in the US.
Here's the list:
- Personal spending for November rose a strong +0.6%.
- ICSC same store sales for last week were reported up +3.3% for the week, and +3.1% YoY.
- Redbook same store sales last week were up +5.3% YoY, the third-strongest showing all year.
- Consumer sentiment from the University of Michigan at 93.6, down just 0.2 from two weeks ago, and together the strongest monthly showing bar one since 2005.
- Gallup's 3 day average of consumer spending hit $130 on December 14th for only the second time since the onset of the last recession
- Gallup's daily Economic Confidence index just had the best daily (-1) and weekly (-4) readings since before the last recession.
It is crystal clear that in the last 2 to 3 months, there has been a real change in attitude among average Americans about the economy, and their wallets are showing it.