Fellow
Shortrunners,
Predicting business cycle turning points is one of most critically useful parts of economic forecasting and macroeconomics in general, but there always seems to be quite a bit of doubt among both economists and the popular press concerning whether predictions can be made of future activity or even whether our ability to make predictions is becoming any better. Business cycles and periods of recessions are by no means a recent phenomenon. Before the Great Depression, another term was used for recessions, panics. Panics often implied that downturns were caused by banking panics built on irrational demand for dollar assets. Recessions now have very similar characteristics, but the players are no longer mobs waiting at the bank window for cash, they have become mutual fund managers, hedge funds, and money managers. Recessions have nearly the same characteristics as panics, the only difference being that a rush for cash draws money out of investment directly as the money managers respond to data and expectations as opposed to the withdrawing of savings funds causing economic downturn.
This slight difference has had large effects on how business cycles can begin and how the transmission mechanism of the markets function. However, the ability to predict a recession has remained just as difficult, despite the gains made in economics academia over the past hundred years. The problem remains that economic activity does not remain constant long enough to provide an accurate measure of growth and money data. Economic indicators shift in significance as the indicator's accuracy rises and falls. The reliance on indicators that have been accurate in the past may be a weakness in the economic forecasting profession since growth always signifies changes in the way the economy performs and makes measurement of economic activity extremely difficult. In a market economy, stability cannot be taken for granted.
This problem is easily observed in the real world as business cycles have remained elusive in prediction and policymakers and not to mention the popular press are caught off-handed when a downturn strikes. Looking forward, one of the current FOMC's new techniques is relying on forward looking measures and expectations rather than past data, reversing past Federal Reserve strategies. This most recent, sharp downturn serves as evidence that the market ability to predict rises and downturns are very poor, considering the rise and plunge of the Nasdaq and the rise and fall of GDP growth. The ability to foresee economic activity with consistent accuracy remains very elusive. Considering the focus on money growth paid in the previous Federal Reserve regime, the new reliance of non-money indicators is a sign in the extreme shift of useful measures. Just as money growth data became a good indicator of real activity, these easily measured forms of money shifted as new financial instruments made measuring money more complex.
Economists often joke that they may have predicted 11 out of the last 6 recessions or admit that even they were caught by surprise when the "soft-landed" engineered by Greenspan yielded to discussion of a full-blown recession. Economic forecasting and measurement will always be elusive for economists and investors. Developing more reliable measures of economic activity demands specific attention paid to the adopting of new products rapidly into commonly-used measures. Quick adoption of changes and more complete collections by the Commerce Department and the Census Bureau mean that the budgets of these agencies should be expanded and new creativity could be drawn to measurement issues. Federal budget money could surely make the process more complete and useful to economists and would even allow for the difficult business of gauging the growth of Federal tax revenue could be improved, likely leading to better economic forecasting decisions by the Congressional Budget Office and White House economic counsel. Perhaps then we wouldn't have fallen into the trap of giving tax relief in a time when the future of the government budget is very much up in the air.
.
Daniel Hicks
Economic Releases
The data section provides charts and data for the most important economic indicators.
Personal Income: 0.3%
- Personal income figures were of special interest this week. Revisions to the National Income and Product Accounts meant revisions to the personal income series. The nominal saving rate of -1.1% reported last month is now reported as a saving rate of 1.2%. Consumption growth outpacing income growth led the rate to fall to 1.1% during June. The revision addresses concern which I have been mentioning over the past several months that the saving rate had been understated.
Consumer Confidence: 116.5
- Consumer confidence continued its downward spiral last month, falling to 116.5 amidst expectations of a weak labor market. The release was lower than expected and may help provide support another Fed rate cut.
Construction Spending: -0.7%
- Construction spending for the month of June was much lower than had been anticipated. This release, coupled with the low consumer confidence release helped to bolster expectations of a rate cut. This in turn helped to fuel the gains experienced in the stock market during the week, despite gloomy profit releases.
NAPM
Index: 43.6
- July's release of 43.6 for the manufacturing release of the NAPM indicates a contracting manufacturing sector in the United States, unable to pull itself from the grips of economic slowdown. Fortunately, the smallest component of the release was the prices paid component, an indicator of manufacturing inflation. This would seem logical as low capacity usage and large technological advances of the past few years have helped to control cost growth.
Jobless
Claims: 346,000
- Jobless claims for the week have begun to trend downward. The recent decline however does not appear to be strongly apparent in the most recent unemployment release. Signs of an improving labor market would be surprising, as we wouldn't expect the labor market to the be the first market to make a significant recovery during this period of slower growth. Typically the labor market operates with lags, those involved with the commonly referred to classes of unemployment such as search and wait unemployment.
Unemployment Rate: 4.5%
- Despite a significant rise in the labor force of some 420,000 individuals, overall unemployment only rose 27,000, enough to bump the headline figure up to 4.5%. The release is heartening in that it suggests that the economy is still able to produce more jobs for a rapidly growing labor supply. This should help to prevent any sort of excessive unemployment in the near future. Evident in the figures was a large shift from manufacturing to service employment, which is pretty much evident in all aspects of the economy.
ECRI
Future Inflation Gauge: 103.2
- Consistent with other leading indicators, the ECRI Future Inflation Gauge fell to 103.2 suggesting that significant future inflationary pressure will be non-exist.
NAPM
Non-Manufacturing: 48.9
- The NAPM service survey which has been dipping above and below 50 fell to 48.9 in July. The movement was strongly influenced by weak employment results and falling future orders. When new orders declines, it suggests that near term recovery is unlikely as the manufacturing industry will continue to weaken with the falling levels of demand.
ECRI Weekly Leading Index:
121.3
- The Weekly Leading Index held constant at 121.3 last Friday. The index is still suggesting further deterioration in the growth rate of the US economy to the extent that for several months it suggested a recession. The Economic Cycles Research Institute is one of a few select groups that still studies the possibility of business cycle activity in the United States.
Classroom
Check out the new classroom section and watch for it to grow and change in the coming weeks as we implement drastic reconstruction to the section. Comment and suggestions as to the best method for this kind of a section would be extremely helpful.
Articles / Book Reviews
Newest Articles:
Balance
East and West
- Contributed by Kautilya AKD
Bush's
Tax Plan Just Doesn't Cut It
- by Alex Rothenberg
Newest Book Reviews:
The
Firm, The Market and The Law by Ronald Coase
Megatrends
Asia by John Naisbitt
Geography and Trade by Paul Krugman
Fuzzy
Math by Paul Krugman
Growth
Theory: An Exposition
by Robert Solow
Site News
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Issue #62
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