Tuesday, September 27, 2016

Ozzie and Harriet would be Mortified

A man and his wife were driving down a curvy mountainous road. The wife was driving.  They were arguing. All of a sudden the man yells out "Pig!" The wife looks at him in disdain and says "Jerk" and then immediately she ran into a large hog crossing the street. 

How many situations are like this? How many times do we go off half-cocked? How many times do we perpetuate arguments and differences of opinion because we fail to consider other viewpoints? Are we really always right and the other people are always wrong? Are there no truths somewhere in between? 

Consider all this in the context of the coming election. The majority of things we read and see today are not involved with anyone trying to convince us as to the best way to move forward in a very complicated world. Much of what we hear is personal attack – Hillary is a liar and a corrupt person. Trump is dumber than the Three Stooges and will immediately start World War III. When I discuss the election with my liberal friends most of them imply that if I vote for Trump I will have willingly sided with the devil. My conservative friends explain that voting for Hillary makes me no longer worthy of salvation. Either way I won't be invited to many parties. 

To me all this seems sad and worrisome. It is sad because it further divides us. We are not debating policy – rather we are making our differences more vivid and rigid. It is worrisome because it promises to continue to prevent us from seeing the world as it really is and trying to fashion remedies for our most challenging problems.

Before you start reminding me of all the evils that the other guys stand for and roasting me over a gumbaya-less campfire, let me explain a little more from where I come. While it is true that the people on the other side of the political aisle see the world differently and say some scary things, let’s try to image what we have in common.

·       We all, except for Charlie the Tuna, are part of the human race.
·       If we have families we want them to be happy and safe.We want our children to enjoy youthful experiences but also to learn responsibility
·       We want access to high quality healthcare that is affordable.
             If we have children we want them to grow up learning and to be prepared for life.
     We don’t want to wear gas masks to work and we want good jobs.  
·       We want to be a positive force in the global economy while recognizing that there always seem to be some countries or parts of countries that want to hurt us.
·       We believe that governments have proper roles in society but the positive outcomes of government are not automatic.
·       We know that governments, business firms, labor unions, and football teams are composed of mostly good people but to some extent they are populated by some really evil and corrupt individuals.  

Some of you are gagging so I will stop. I could go on. And on. And on. But its true. We have many common goals. I know – there is a conspiracy of progressives who want us all to become Communists. I know – there are many conservatives who want to preserve only the fittest and the rest be damned. I don’t disagree. There are some people like that. But what I also know is that most of us just want to get up in the morning, eat our Post Toasties, send our kids to school, go to work, and start planning weekend parties! 

We definitely disagree on the particulars of how to attain the above outcomes. We even disagree about the nature of the human spirit. But come on -- in a country of almost 330 million people, not everyone is going to see things the same way. My way or the highway is not going to work. 

But we can’t make any real headway because more and more of us get processed by the dividers who, by the way, get money and power by continuing to divide us.

We don’t have time to waste. As we hurl insults at each other, Rome burns. How do we deal effectively with ISIS? With other national enemies? National debt? Two-way racism? Economic growth? Crime? Security? and so on?  

Each of the parties will try to convince us that their way is the only way as they use every trick in the book to turn us against their evil competitors. But the evil competitors are mostly just like us. They want to see problems solved and get on with their lives. And worse, as each side slowly creates enemies lists we make it increasingly impossible to see our problems objectively and to find solutions that make any sense. We are on a path to Hell. 

Ozzie and Harriet would be very disappointed in us.

Tuesday, September 20, 2016

Joe Friday: Just the Facts M'am

As we come closer to Election Day in the USA we will hear and read a lot of things about the US economy. The blue team will brag about their victories over incomes, employment, and poverty. The red team will say the economy plods and weaves like a drunk on Kirkwood Avenue at 2 am. As you know I love data and so I decided to play around with some familiar information. It is impossible to summarize all economic data in a small space so I decided to focus on recent changes in real GDP and its components.

I stick to the facts today. I think the facts tell a clear story about slowing economic growth and one that deserves a policy discussion. But that discussion will have to wait. I already used up today's word count. 

GDP is a measure of the nation’s output of goods and services. Real GDP means that we are measuring output in constant prices –meaning that price change is not part of the change in real GDP. If real GDP increases it is totally because output or quantity produced changed. We like to analyze output because it usually has a strong association with things like employment, incomes, and sales of Jack Daniels.

GDP is output. It does not tell you about financial wealth. Of course if we are wealthier we often buy more goods and services but GDP does not directly measure wealth. It does not measure poverty and it does not measure distribution of income.

I wanted to examine near-term changes in real GDP so I did the following. For real GDP and each of its major components I looked at the annualized* percentage change over the past two quarters, past four quarters, and past eight quarters. By doing that I could get an idea as to whether things are improving, worsening, or staying the same.

For example, in the past two quarters real GDP grew by an annualized 1%. That was slower than the 1.2% it grew over the last four quarters and was less than half of the 2.1% annualized rate it grew in the last two years. These calculations suggest that things are clearly worsening. In 2016 the US economy is growing considerably slower than in the past year or two. And by the way – even the 2.1% rate two-year rate is not a strong growth rate for the USA.

Rather than speculate on a lot of causes of this slowdown, I decided to focus today on the components of real GDP. Recall that the Product Account approach to measuring real GDP focuses on the buyers of the output. The standard approach sees four buyers of US produced goods and services – domestic consumers, business firms, (federal, state, and local) governments, and foreign buyers. If real GDP is slowing it is because one or more of these buyers have slowed their purchases of US goods and services.

So I looked at consumers first. Households spent an annualized 4.5% more than two quarters ago on goods and services. Compared to the 1% overall GDP growth number for the past half-year, that’s a very strong rate. Way to go consumers! But even consumer spending has been slowing. Over the past two years it grew by an annualized 6.2%; it grew by 4.8% over the past year; and then 4.5% over the past half year.

Consumers desire for newly-built residences also flamed out. What we call Residential Construction declined by -0.2% in the past two quarters. Residential Construction grew by 5.7% in the past four quarters; by 8.5% over the past two years.

What about business spending? Business firms buy newly produced structures, equipment, and intellectual property. Here the news is ugly. Equipment spending was down by almost -7% in the last two quarters. That was a major decline from the -1.9% in the last year and the 0.7% annual rate of the past two years. Buying of new plant and other business structures shows a slightly different but dismal pattern of contraction. For example, spending on Structures was down by an annualized -4.3% in the past half year; -7.1% in four quarters; down -5.2% annualized in the past eight quarters.  The only positive story for business spending was for intellectual property purchases – growing at about 5% over the past two years.

If you like numbers instead of growth rates – business spending was up by about $30 billion dollars since the second quarter of 2014. During that same time period personal consumer spending was up $674 billion. Business spending on plant and equipment is the main way we expand both productivity and productive capacity. 

US exports are goods and services we sell to foreigners. The story there is not encouraging and falls in line with a slowdown theme -- declining by -0.2%/-1.3% in the last two/one years respectively. Exports leveled with 0.2% growth in the two past quarters.  

Let’s turn to some of the government buying numbers**. There is nothing particularly interesting coming out of federal versus state and local government spending. All government spending has slowed in the past year and past six months. More interesting is the breakdown of federal spending between defense and non-defense. In the past 6 months, defense spending slowed by -3.1% after contracting by -0.8% in the past year and by -1.5% in the past two years. Non-defense spending, in sharp contrast, grew by 2.3% over the past six months; 2.9% over the past year, and 3.3% annualized in the past two years.

I know there are a lot of things to discuss with respect to the economy and national policy. But the recent real GDP figures are very clear.

·       The economy is slowing.

·       The strongest growth sectors have been household spending on goods, services, and houses, – though even that strong growth is declining over the past two years.

·       Also contributing to positive economic growth was non-defense federal government spending on goods and services.

·       The weakest sectors showing significant contractions are business spending on plant and equipment and defense spending.

*All the figures in this post have been annualized. Whenever you compare different time periods you need to find a way to make them comparable. By annualizing, for example a half-year change, you are calculating how much real GDP would have grown in four quarters if it continued at the same pace as over the two quarters. When you annualize a two year change – you are showing how much it grew, on average, per year. 

** The government figures quoted here reflect only government purchases of goods and services. Much of what the government spends is for transfers and net interest. That information is found in the government budgeting figures but are not a direct part of the components of GDP. 

Tuesday, September 13, 2016

Happy Trails or Fearthquake 2?

This is dangerous. It is Saturday and the time I usually begin the drafting of Tuesday’s blog post. The financial markets will open and close on Monday before I post my usual dribble. Common sense would argue to let the experts stick their necks out and say stupid things that turn out to be wrong. I could instead write about Donald’s ties or Hillary’s latest pantsuit. But no, I decided to join the fray. Don’t ever say that economists don’t live life on the edge. Please note the dripping sarcasm.

Anyway if you have a television or a cell phone, you know that financial markets did a crazy dance on Friday. The main market indexes closed 2% down and US interest rates rose. I am guessing that in some places gravity pulled things up and sinners read Bibles. It was quite a day.

Those of us who were alive and over the age of seven in 2008 remember a similar decline in the markets. In that case one decline led to another and it wasn’t long before billionaires were removing zeroes from their wealth numbers. So if people are a little crazy this week it is because they have personally seen the fearthquake’s ability to turn everything upsidedown. See last week’s post if you don’t know the word fearthquake.

Many of us are beginning the football season unsure of what to bring to the tailgate. Should we bring expensive bourbon or PBR? Was Friday a false signal? Was Friday an exaggeration? Or was Friday the beginning of hell?

I am guessing that Friday was an exaggeration. Mom, that truck is going to hit us. No it isn’t. Yes it is. No it isn’t. Well, it isn’t really a truck. It’s a toy truck.

In my stupid example the truck is a metaphor for rising interest rates. On Friday we saw what happens when more and more people became surer that a truck is going to hit them. Fed officials said this. The ECB said that. Japan said so and so. All that information helped people become more sure that interest rates are going to rise and stocks plummeted.

I don’t question any of that. But what we collectively are not sure of right now is how big the truck is. A truck is coming but how devastating will be the resulting collision?
One view is held by the naïve mathematicians. Naïve means a strong belief in mean-reverting behavior. Suppose you averaged 180 pounds for most of your life and you get ill and lose 20 pounds. A mean-reverting forecast would have you gaining 20 pounds and going back to your normal weight. If an interest rate had an average of 5% and is now 2%, then a similar approach would believe the interest rate is headed back to 5%.

Mean reverting forecasts make a lot of sense. But notice they are based on an “everything else is the same” assumption. You dropped weight because of illness. When the illness departs you gain back the weight… if everything else is the same – your eating is the same, your exercise is the same, and you still have most of your teeth.

But mean-reverting behavior makes less sense if much has changed. With respect to interest rates, has anything changed? It depends on who you talk to or read. My Republican friends would tell me that Obama has destroyed the US economy. As such capital is worth less, the economy will grow slower, and the trust in bonds has diminished. Furthermore demand, like the final third of a cheap cigar, is harder to draw and is leading to permanently lower inflation. My Democrat friends would point to the negative impacts of income redistribution, globalization, and deplorable Republicans in harming economic growth, demand, and inflation.

If these lovely people are correct, then the usual pressures that would produce a return to a 5% interest rate (from the example above) are missing in action.  That means that the changed economic reality of today and tomorrow does not imply a return to any specific higher interest rate. Surely rates will rise but will they rise by 1%, 2%, 3% or more?

These are some of the questions discussed at our Saturday tailgates. Surely our favorite teams will win by many touchdowns and the deviled eggs will be delightful and make the JD go down ever so nicely. But don’t expect that these questions will be resolved on Monday (yesterday) or today. Get your seat belt on for another good ride. Or maybe they will be resolved and today will return to unicorns and methane-free cows. 

I am guessing that the bucking will go for a while but when the dust is settled we will be back on our slow-growth economy with nervous stock prices and interest rates. Interest rates will rise but ever-so-slowly. 

I’ll end this with the lovely words that Roy used to sing to Dale,

Some trails are happy ones,
Others are blue.
It's the way you ride the trail that counts,
Here's a happy one for you.
Happy trails to you,
Until we meet again.
Happy trails to you,
Keep smiling until then.
Who cares about the clouds when we're together?
Just sing a song, and bring the sunny weather.
Happy trails to you,
Until we meet again.

Tuesday, September 6, 2016

The Fed, Fitbit and Fearthquakes

Can you weigh yourself too often? Most of us are concerned about our weight. Being too heavy or fat is not what we strive for and in many cases we ought to be concerned for health reasons. As such, measuring one’s weight or girth is not a bad idea. The question then is how best to measure.

The measure I prefer is how my clothes feel. I cannot fool my Levis. When I gain weight they scream at me. Another approach is to buy a nice scale and stand on it now and then. I approximate that once a year when my blankety-blank doctor insists on knowing how much I weigh at my annual physical. To add insult to injury he makes me wear my shoes on the scale. Others think it sensible to detect trends and to weigh oneself at least once a month. My Fitbit friends are at the extreme. They measure every second.

And that’s where I part company. And that’s where I also get to today’s topic, the Fed. The Fed thinks it needs to read the pulse of the nation every minute. As if these frequent measurements will help them manage the US economy better. Think of your weight again. Body weight is partly mystery. You and I have both gone on radical diets that lasted at least 12 hours. And guess what? The stupid scale said we gained weight. And even if weight was a little more understandable and we did lose 0.5 pounds in 12 hours or 12 days – what then would that tell us? Way to go dude. Go eat a big buffalo burger.

Good monetary policy ought to be like a good diet. It works because you apply a new sensible regime over a long period of time. Or maybe it is more like a steamroller. If the road gets bumpy then flatten it out. Don’t take a hammer and flatten each and every bump as it arrives.  Ms. Yellen’s Fitbit contains an intermittent flow of hundreds of pieces of relevant but often conflicting information on a daily basis. It has her mesmerized. As recently as last week she was still not convinced that the US economy was growing fast enough. Let’s take in a little more data today. Maybe tomorrow she will be convinced. Or maybe not.

Meanwhile what is the problem? Why can’t we just lumber along? We aren’t growing very fast but we are growing faster than most other countries. Shouldn’t we be happy and proud about that? And inflation is not a problem. Give Ms Yellen a break. This line of argument shows how successful she, her buddies at the Fed, folks in government, and the press have been about hiding the elephant in the shop. It amazes me that except for an article here and there in some business tabloids, everyone is silent about something called imbalances.

Imbalances is not a great word. It doesn’t shout “save me” in the same way that recession or rich persons or automatic rifle does. Maybe I should make up a new word. Let’s call it a Fearthquake. F has nothing to do with methane this week. F means financial. Earthquake means well earthquake. They had an earthquake in Italy recently. We know earthquakes are terrifying events. A Fearthquake is just as bad. We had a Fearthquake in 2007. We are still suffering from the aftershocks.

That Fearthquake and the looming next one come from imbalances. In the case of 2007, the imbalances were in the housing and equity markets. Maybe that is why we are so reluctant to name this evil. Many of us were enjoying price appreciate in our homes and stocks. No one wanted to rain on that parade. But the Fed learned nothing from that episode. It is totally obvious that keeping interest rates low to negative for almost a decade is causing the economy to walk slowly and with a limp. Saving makes no sense in this economy. 

One wonders why productivity is so slow. Has there ever been an economy in the world that had strong perpetual growth in productivity and output with such little saving? And risk tolerance. I am not a finance expert but corner one if you get a chance. Because of low interest rates households are moving into bonds instead of money; into risky bonds instead of low risk bonds; into equities instead of bonds, and so on. And firms are doing the same things. Government believes they can borrow more and more – and a rising national debt will have no negative consequences. They back student loans as if these loans will ever be paid back. Please tell me Ms Yellen why you don't talk about any of these imbalances and the coming Fearthquake?

Call it imbalances or a Fearthquake. Ms Yellen needs to trash her economic Fitbit and put on her jeans. Maybe they will convince her that something bad is coming. It might not be too late for a return to sane monetary policy.