The Short Run Weekly Issue 70

Fellow Shortrunners,

     A good number of economists are now suggesting that a recession is unavoidable for the US economy. Unfortunately, there's a lot of economic data that supports them. That said, what exactly is a recession? Slower growth, more joblessness, less prosperity, and a bunch of other bad news. At the same time, the media and a great majority of financial and economic news sources are bombarding the world with dismal predictions and forecasts of the economic fallout. Rather than join in the chorus, I'm going to take a break this week from a discussion on the economy and focus on some new changes in how the economy is being measured. As always, analysis of important economic data releases during the week are available below and if you're curious as to some of the things making economists and forecasters glum, this is a good place to start.

     Economists typically measure the economy in two ways. They look at time-series data and at cross-sectional data. As the name implies, time-series data allows them to understand trends and changes in economic variables over time. Cross sectional data compares a set of economic variables during a snapshot of time. When making economic models, it is often necessary to use one or the other method and in some instances, both. A recent change by the census bureau has far reaching econometric (the measure of economic variables) consequences but these consequences differ widely for the type of data being used.

     When a researcher is looking at the economy, it is often valuable to compare how different sectors of the economy are performing. Perhaps industries such as textiles in North Carolina are stagnating, while gas utilities in Maine are in recession and all the while semiconductor producers in California are growing rapidly. Its often useful to look at these industries for economic policy, but the gathering of extensive data, as with any research, is expensive. To simplify the matter, the Census Bureau has traditionally classified the economy's activities into what it calls the Standard Industrial Classification System (SIC). In fact, the SIC categories have been around since the 1930's and had began to become outdated.

     In response to this, the Census Bureau has recently released the NAICS, or North American Industrial Classification System, a joint venture between the US, Canada, and Mexico. Their results have been published in a 1200 page tome and are now getting incorporated into a wide range of variables, including the National Income and Product Accounts (such as GDP), measures of productivity and industrial production, and even the index of leading indicators. According to the Census, some new categories are being introduced and other new forms of business transactions are being included. Further information is available online for those who are interested here: http://www.census.gov/epcd/ec97brdg/introbdg.htm.

The overhaul to the way in which we classify business, in an effort to bring it up to date, has an immediate impact on the analysis of cross-sectional data. That is, comparisons among different sectors of the economy at a given moment in time are in some ways more accurate. This can be confusing and complicated because not all series have been converted to NAICS, but at best, this is a temporary headache. For time-series comparisons, this presents a whole new problem. How do we reconcile data that is measured using SIC categories, in many cases the historical series, with the more recent data, now recorded in NAICS? For example, NAICS is only measured as far back as 1992 for the National Income and Product Accounts, and as such, longer time comparisons have now become more complicated. But these issues are normal for economists; measuring the US economy is difficult, and the tools which we use to gauge activity are often changed.

Sincerely,
Daniel Hicks

Thanks to everyone for sticking with me. With this issue there are over 500 subscribers to the Weekly Newsletter.

Economic Releases

The data section provides charts and data for the most important economic indicators.

Index of Leading Indicators: -0.3%

The index of leading indicators, the conference board's forecast for future economic activity, contracted 0.3% in August. If we put our faith in leading indicators, then this would suggest that economic activity forecasted for September and the following months were already gloomy before the terrorist attacks. A decline of 0.3% is relatively significant and ceteris paribus, this would normally be considered a big drop. That said, this was truly dwarfed by the magnitude of the conference board's consumer confidence release. It seems that the release for September (my attempt at forecasting an index which forecasts the future, pretty strange huh?) is not likely to show any signs of significant improvement.

Consumer Confidence: 97.6

A strongly investigated and anticipated release, consumer confidence, plummeted during September, even though some of the survey was completed prior to the 11th. The drop was the largest since the US invaded Iraq. The decline in consumer confidence, including their buying habits and decisions, will affect the largest component of GDP, consumer spending, which accounts for nearly two-thirds of the total. Nearly every component measured in consumer confidence declined. Apparently they didn't survey retailers of American flags or gas masks, both of which have experienced drastic increases in demand.

Existing Home Sales: 5.8%

Existing home sales, bucking the trend of falling indices, rose during August, climbing another 5.8 percentage points. The likely impetus for increased home sales is the low interest rates that the recent rate cuts have created and consequently, the low mortgage rates. This is just one of the more direct impacts that lower interest rates have on the economy, and regardless of whether or not they have strongly influenced the rest of the economy, the climate of lower interest rates certainly has made the housing market boom. The release is for August and it remains to be seen how strongly shaken confidence from the terrorist attacks will affect the housing market and longer-term purchases in general.

Durable Goods Orders: -0.3%

In line with expectations, durable goods orders for the month of August slipped 0.3%. I cringe at the thought of what durable goods orders for the month of September and the next few months will be, considering the cutbacks by the airline industry and Boeing's changing plans. Advance durable goods orders are highly volatile, and the major reason for this is the relatively un-smooth ordering of airplanes.

Jobless Claims : 450,000

Adding further fuel to an already blazing fire of bad news, jobless claims spiked to some 450,000 last week, indicating that further job cuts were taking place and that the labor market was looking less appealing. Continuing claims, an indicator of the difficulty of finding a job, continued to rise as well. With future job cuts planned but not in action and demand slowing, the future of the labor market is relatively uncertain. Recovery in the short term is highly unlikely.

New Home Sales: 1%

In a much more moderate advance than existing home sales, new home sales jumped a little over a half of one percent. Again, these sales, like the existing home sales, are for August, and they too will likely be impacted negatively in the coming months as a result of declining consumer confidence and uncertainty about the future.

2nd Quarter 2001 GDP: 0.3%

Revisions to second quarter GDP growth were minor. This release is unlikely to attract a great deal of attention because as far as revisions go, this one is pretty minor. The key national income and product account to watch will be the preliminary release for 3rd quarter GDP, which many analysts believe will dip negative.

ECRI Weekly Leading Index: 116.7

The ECRI WLI declined to 116.7, while the release for the previous week was revised downwards as well. The weekly leading index was strongly influenced by the rising jobless claims, but there are other factors which should have helped to counter the decline, such as a rise in the money supply.

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:

Money and Power by Howard Means
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