August 2008 Archives

Real GDP was up 3.3% in the 2nd quarter.  That's more than most expected.  Certainly not what you'd expect to see in a recession.  It should be noted that this is not a clean bill of health for the economy.  It would be premature to say that we're out of the woods.  However, if this is a recession, it would be a pretty unusual one.  As King Banaian put it a couple days ago in response to labor market news, "If it be recession, it be wimpy."  And so today's news further complicates the picture.

Just what I needed as I sit in contemplation as I prepare to write about the local economic outlook.

The Wall Street Journal's Real Time Economics blog makes the following observation:

But the forecasts of a shrinking economy may not be so far off the mark after all. Gross domestic income, which Fed officials have in the past highlighted as perhaps a better measure than GDP, advanced just 1.9% at an annual rate last quarter after contracting the two previous quarters. Thursday's report is the first to show first quarter GDI in the red.

...

GDP is a consumption-based measure, adding up consumer, business and other spending and investment as well as net exports. GDI is income-based, adding up things like personal income and corporate profits. GDI is included in quarterly GDP, but not in the first, or "advance," estimate, so Thursday's report was the first for second quarter GDI.

In theory, the two should equal each other, but they don't always. In recent quarters, net exports seem to be the main reason, since they flow directly into GDP but only indirectly into GDI. In addition, GDI more heavily reflects corporate profits than GDP does.

Before-tax corporate profits grew slightly in the second quarter after falling the previous two quarters. The difference between GDI and GDP is more than just academic.

In a Fed paper released last year, Fed economist Jeremy Nalewaik wrote that "real-time GDI has done a substantially better job recognizing the start of the last several recessions than has real-time GDP." Fed officials have even taken notice. According to the Fed's May 2007 meeting minutes, when economic data were giving mixed signals on the economy's underlying state, Fed officials "discussed how best to reconcile the slowdown in output growth over the past year with the relatively strong performance of the labor market."

"This apparent tension could partly reflect measurement issues; in particular, participants noted that the more-rapid gains in estimates of gross domestic income over this period might better capture the pace of activity than the modest advances in measured GDP," the minutes said.

Now that the two measures have flipped with GDI lagging, it seems likely that Fed officials will now take 3%-plus GDP growth with a big grain of salt.

True.  One other thing to consider is how much the weakening dollar is helping GDP by reducing the trade deficit.  Exports are growing rapidly while (real) imports are shrinking.  The real trade deficit (quarterly SAAR) is about a third less than it was a year ago.  That's pretty significant, and definitely accounts for some of the increase in GDP.

In fact, the contribution of net exports to real GDP growth last quarter was 3.1%.

Out of 3.3%.

While I still think that the Fed's next move will be to raise interest rates rather than lower them, I admit to being a little concerned that a rate hike too soon might strengthen the dollar before we're ready.

Mark Thoma has more.

The upgrade to MT4 is (basically) complete. I'll be tweaking it a little bit, but overall I like it. The design is one of the many styles in the MT4 style library.

I still need to figure out where I would like to put the blogroll. When I do, I will put it back up with some new links that I've been meaning to post for a while. In the coming days, I will probably find some additional widgets to add to the blog as I try to bring it (and keep it) up to date.

I have set up all of my course websites on a similar style, and they look so much better than the old sites I had. I built my first course website back in about 1996 or 1997 (I think I still have the html files buried somewhere), and have only made wholesale revisions to them in 1999, 2005, and now 2008. I guess that would make these my "Coursepages 4.0". They've come a long way, but still serve the same function. I do think that the blog format will support my course podcasts a bit better than the traditional web page, however.

If you don't see the change in style, just hit refresh. Your browser might have the old stylesheet in the cache.

UPDATE: It appears that the comments are not working at the moment. I'm working on it.

UPDATE 2: Comments are working.

It has been a month shy of 4 years on the blog, so it's time for a little upgrade. The impetus for this change comes partially from my desire to put all my course websites into a blog format (as opposed to the traditional web page). In the process of doing that, I figured I might as well upgrade to Movable Type Open Source for the main blog as well as my course blogs.

So stand by... there will be a change coming soon.

Obviously a lot of people were hoping for some insight on inflation and the course of interest rates. However, the real story is here: (Full text of Bernanke's speech)

An effective means of increasing the resilience of the financial system is to strengthen its infrastructure. For my purposes today, I want to construe "financial infrastructure" very broadly, to include not only the "hardware" components of that infrastructure--the physical systems on which market participants rely for the quick and accurate execution, clearing, and settlement of transactions--but also the associated "software," including the statutory, regulatory, and contractual frameworks and the business practices that govern the actions and obligations of market participants on both sides of each transaction. Of course, a robust financial infrastructure has many benefits even in normal times, including lower transactions costs and greater market liquidity. In periods of extreme stress, however, the quality of the financial infrastructure may prove critical. For example, it greatly affects the ability of market participants to quickly determine their own positions and exposures, including exposures to key counterparties, and to adjust their positions as necessary. When positions and exposures cannot be determined rapidly--as was the case, for example, when program trades overwhelmed the system during the 1987 stock market crash--potential outcomes include highly risk-averse behavior by market participants, sharp declines in market liquidity, and high volatility in asset prices. The financial infrastructure also has important effects on how market participants respond to perceived changes in counterparty risk. For example, during a period of heightened stress, participants may be willing to provide liquidity to a market if a strong central counterparty is present but not otherwise.

and here...

Going forward, a critical question for regulators and supervisors is what their appropriate "field of vision" should be. Under our current system of safety-and-soundness regulation, supervisors often focus on the financial conditions of individual institutions in isolation. An alternative approach, which has been called systemwide or macroprudential oversight, would broaden the mandate of regulators and supervisors to encompass consideration of potential systemic risks and weaknesses as well.

The latter is, of course, much easier said than done. It will be interesting to see what sort of ideas come out of the conference.

Beloit College's annual "Mindset List" is out, just in time for the start of classes. As I pointed out last year, they are recycling old material. So far, at least three (I quit counting) of the eleven installments make reference to Johnny Carson (or Ed McMahon). Looks like one of the list creators was a real Tonight Show fan. There are always some Cold War references too.

Over the years, the list has become rather formulaic: _____________ (person, place, or thing) have/has always/never _______________ (something that it wasn't/was prior to the year they were born).

Example from this year's list:

Wayne Newton has never had a mustache.

I'm not sure all of them know who Wayne Newton is. I'll find out next week and report back.

In addition to that formula, there are also the obligatory references to movies and television shows that came out the year they were born.

This year's list is of some interest to me as I graduated from high school and started college in 1990, the year that many of this year's freshmen were born. The Beloit list mentions that for this year's freshmen, Stevie Ray Vaughn has always been dead. Indeed. He died in a helicopter crash on August 27, 1990. This was the subject of some sorrowful discussion among us 18-year-olds during my own freshman orientation.

While the list does invoke nostalgia, the focus on the year of birth for this year's freshman is too limiting (and was not the way the list began). As we begin classes, it is useful to think about changes in pop culture and the differences between the way the generations see the world. It will be a few years before Beloit's list references 9/11, but this year's freshman class was entering 6th grade in 2001. They were 11 years old. They have very little (if any) meaningful memory of the way the world was geopolitically before 9/11.

Only 8 more years until they can tell the incoming freshmen that Beloit College has always been publishing the Mindset List.

Christian Zimmerman has set up a new blog aggregator for academic economics, called Econ Academics. Looks very good.

That reminds me I need to update my blogroll. Just need to get all my changes together and do it all at once.

Gabriel M. recently arrived in the U.S. from Romania to study for a Ph.D. in economics. I wish him the very best in that endeavor. Today, he gives us a list of observations of the things that have made the biggest impact on him since his arrival. Funny how Americans take some of these for granted. For example,

“Free refills”, a.k.a. all-you-can-drink for a flat fee—for soft drinks that is.

And the sort of thing an economist would notice,

Lower prices than in Romania for most food, household appliances and other basic necessities (at Walmart, for example) and higher prices for almost everything else (at exchange rates).

And unfortunately,

Lower Internet bandwidth at a higher price, compared with what I got back in Bucharest. This is particularly interesting.

We are lagging behind in high speed Internet access, that's for sure. I pay $29.95/month for about 1.5Mbps. I could go faster for a few dollars more, but for most of what I do right now 1.5 is fine. (I don't do a lot of online gaming or Second Life or anything like that.) But I am quite confident that over time I will want more.

But here's the interesting thing.

Three years ago when I signed up for service with my ISP, I got 384kbps for the same $29.95. A couple months after signing up, they improved their service and lowered their rates, so I got about 750kbps for $29.95. Recently, they did it again, this time upgrading me to 1.5Mbps for the same $29.95.

Obviously, I'm hoping that they'll double my speed again in the near future.

The fastest service that I know of in my area is about 16Mbps and that would run about $70/month. Right now I don't see the need for it at that price, but it's nice to have the choice available.

I am happy to report that macroblog is back. David Altig, who had been running the blog independently since 2004 when he was at the Cleveland Fed, has brought back the blog with a new look and some new co-authors. Altig, now research director at the Atlanta Fed, is bringing the other Atlanta economists into the blogosphere as co-authors on macroblog.

Welcome back, David, and thanks for making macroblog part of the research mission of the Atlanta Fed.

The Chicago Fed also has a blog (three, in fact). Are there others I'm not aware of? Are the other Feds listening?

For more on the continuing story of Amtrak's growing popularity in the wake of higher gas prices, we turn to today's Wall St. Journal, which says...

WASHINGTON -- The number of people riding Amtrak surged 13.9% in July from a year earlier, as high gas prices caused more commuters to rely on intercity rail.

...

In July, Amtrak said, only one of its services saw fewer riders compared with the previous year. Elsewhere, there were major gains, such as a 33% jump on the Capitol Corridor between San Francisco and Sacramento, Calif.

Even on Amtrak's already heavily traveled Northeast Corridor line from Washington to Boston, passenger counts are up by nearly 8% over last year. Overall, Amtrak is on pace to serve a record 28 million passengers in its current fiscal year, up from the previous high of 25.8 million last year.

Amtrak's newfound popularity has made an impression in Congress, where lawmakers view the rail service as an environmentally friendly, energy-efficient approach to reducing gridlock and expanding transportation options.

The trains serving Macomb (the Illinois Zephyr and the Carl Sandburg) continue to sell out. The advice around here is to get your tickets well in advance.

Via Tim Schilling, we find this excellent piece from Rick Mattoon of the Chicago Fed.

He starts with the basics...

From a conceptual viewpoint of our economy, natural disasters impact our economic well-being in two basic ways. First, they destroy what we have produced in the past—our “capital stock”—including lives, homes, commercial buildings, public infrastructure and property. Second, they often interrupt normal commercial activity and production. Transportation and deliveries do not take place, people cannot get to work and work places become dysfunctional until normalcy is restored.

...

... Following the 1993 floods, estimates for the third quarter reduced personal income by $9 billion and forecasted uninsured losses to be $2 billion. Losses to proprietors’ incomes were estimated at another $1 billion.

Remarkably, such initial losses soon appear to translate into economic gains as business and households rebuild. The rise in construction activity and the resumption of business activity often boost gross domestic product (GDP) estimates for future quarters, as households and businesses attempt to rebuild their physical capital and, in the case of businesses, to fill order backlogs. For example, following Hurricane Andrew, annualized GDP growth hit 5.7% in the fourth quarter of 1992, spurred by rebuilding activities.

But take heed, gentle reader...

However, such rebuilding does not reflect an actual economic gain in the broad long-term perspective. In most cases the rebuilding merely replaces lost capital stock—meaning that, in the long term, the nation’s product will not exceed what would have been produced without the disaster. While the immediate burst of economic activity is quite evident, the losses from the foregone output of interrupted and diminished business activity may go largely undetected because the diminished growth takes place in small amounts spread over many years.

The last sentence is so true, yet so often forgotten.

Most of the rest of the article goes on to estimate the actual losses. Mattoon finds that the aggregate losses will likely be smaller this year than in 1993, in part because the geographical footprint of the flooded area is smaller.

He finishes with another comparison--one of which I know something from my western Minnesota roots--the Red River flood of 1997 which devastated Grand Forks, ND.

For business, the greatest disruption was for restaurants, bars, hotels and any business where discretionary spending is important. Many of these businesses had to lay off workers. Other businesses such as banks, health care and manufacturing suffered lost sales but did not suffer drastic employment declines. In fact given the gains in construction jobs, employment in Grand Forks rebounded to its pre-flood level in five months. To some observers, the newly rebuilt Grand Forks with its improved infrastructure and new capital stock is better positioned for growth than before the flood, but this is only true because of significant government subsidies and 10 years of hard work. And of course, it is not true for every household and business impacted by the flood, as many chose to leave Grand Forks.

Well said.

I'd sum it up this way. Natural disasters are not a net benefit for the economy. They result in arbitrary transfers of wealth and temporary changes (both positive and negative) in spending and income. The resulting equilibrium (new capital stock and all) is not a Pareto improvement.

Let me state it even more plainly. Anything a natural disaster can do could also be done by a government through the use of forced relocation, bulldozers, and other people's tax dollars.

Yes, I upgraded to Vista when I bought the pieces for a new computer. I did my research and came to the conclusion that for most of what I do I would not run into the many problems that have been described. A couple of days into the experience and I am still confident of that. However, there is one thing that really annoys me.

Vista doesn't trust you.

Oh, I've turned off the User Account Control. I don't need it asking me if I really meant to do everything I do. No, I'm talking about the fact that there are certain things that you need administrator privileges to do in Vista, just like XP. No problem, I figure. I created my account as an administrator. No dice. Apparently being an administrator in Vista doesn't mean that you can do administrative tasks. Ok, so I'll run the shell (cmd) as an administrator. That ought to do it. No dice, again.

Well, ultimately I did what I wanted to do. I was trying to install Flash Player on my new machine. It didn't want to do it in Firefox. Just for fun I thought I'd try it in IE (not that I'd use it there, this was more for curiosity's sake). Well, the IE installation didn't complete, so I tried to remove it. (And that's where all the administrator fun came in.) Never did get it removed. No big deal. It will just sit there until either MS or Adobe can get their products to play nicely with each other. I was able to install it in Firefox thanks to the hint from this nice little site.

And now I'm back on track to putting my system the way I want it. But I now understand the frustration many people have had with Vista. In the end it was not a critical problem, but more of the sort of thing I wanted to follow through on just to see how (or indeed, if) it could be done. Now I know that Vista has some quirks when it comes to file permissions. Basically, it doesn't trust you--which can be sort of an inconvenience during installations. Sadly, Vista does not appear to have an equivalent to chmod 755.

This was expected. Here's the statement.

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.

Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.

Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.

A few changes since the last statement. The part about the "substantial easing of monetary policy, ... should help to promote moderate economic growth" was moved from toward the end of the statement to near the beginning. The paragraph on inflation has been rewritten with more of a direct acknowledgment of inflation being high and the outlook uncertain.

But pay attention to the last paragraph.

August 5:

Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

June 25:

... Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

The phrase about downside risks to growth having diminished has been taken out, as has the phrase about inflation expectations increasing (today they are, rather, a "significant concern").

So what does it mean to be a significant concern? Ask the stock market. As I write, the Dow Jones is up over 300 points.

The stock market doesn't seem to buy their concern. It looks like no change in rates for the foreseeable future.

Here's the monthly report from the BLS.

Let's start with the bad. The unemployment rate was up 0.2%. While I was expecting a little more of an increase, it is still a negative signal. Also, 51,000 nonfarm payroll jobs were cut last month. It is now quite clear that employment peaked in late 2007 and has been trending down ever since. Finally, as Brad DeLong points out:

The U-6 measure of unemployment--reported unemployed plus part-time for economic reasons plus marginally-attached workers all divided by the labor force plus marginally-attached workers--has risen by 1.1 percentage points in the past three months to its current level of 10.3 percent. It now stands 2.2 percentage points above its mid-2000s low, and is just a hair below the maximum reached in the 2001-2003 episode. As you all know, I have been unhappy with the conventional unemployment rate this decade--it has not been telling the same story as the other labor market indicators. U-6 seems to be a better fit to the overall state of the economy.

And by my book, U-6 is now telling us that we are in a recession.

I share his unhappiness with the conventional unemployment rate. It's a rough guide at best. And while I do think that U-6 is a useful indicator, what DeLong doesn't point out is that even today U-6 is a good point-and-a-half below where it was in 1994 (earliest year for which data is available in that series). That was a couple years after the end of a historically shallow recession (granted, it was still a period of labor market weakness).

So yes, some aspects of the economic situation are about as bad as during and shortly after the 2001 recession. Some are worse, and some are not as bad. When you consider the fact that the weakness in manufacturing is part of a longer term structural change, it looks less like a traditional recession even though it may soon (if not already) meet the NBER business cycle dating committee's criteria. If you're in some (though not all) types of manufacturing, this has been one long recession for a decade.

Other sectors of the economy, most notably education and health services, are probably wondering what all the fuss is about. They didn't feel the recession in 2001 and probably won't here either.

So that's the bad news.

But there is a silver lining. First, the average seasonally adjusted mean duration of unemployment dropped from 17.5 to 17.1 weeks. Next, and I think this is a crucial point, the percentage of the unemployed who are reentrants or new entrants to the labor market both increased. In fact, since March, the percentage of the unemployed who are job losers dropped from 53.7% to 50.2%. Reentrants have increased from 27.4% of the unemployed to 30.8%. New entrants have increased from 8.8% to 9.2%. Here's a chart for reentrants. (See also Table A-8 in the report.)

It should be pointed out that this is a pretty noisy signal over the time horizon of a few months to a year. This isn't enough to conclusively determine that a recession is over--if there was one to begin with. However, it is something that bears watching over the next few months. Roughly half of the increase in the unemployment rate this month was due to reentrants into the labor market.

Here's my bottom line. If we have turned the corner and are at or near a the bottom of this business cycle, then you're going to see unemployment due to reentrants rise further, which may temporarily (i.e. between now and the election) push the headline rate higher. If we have not yet turned the corner, then this may have been noise and the labor force participation rate may fall a bit in coming months. I can't say which it is yet. I don't think anyone can.

But the labor market is a lagging indicator, so if the rise in reentrants is not just noise, then that is good news indeed. But the U-6 number is bad news any way you slice it. So yet again we are left longing for more information. The economy remains at a critical point--teetering on the edge of a recession. Maybe in one. Maybe pulling out of one. I do have a feeling that if a recession is declared, it will not be declared until we are actually out of it. Perhaps we already are. But the labor market weakness lasts a couple years after the "official" end of a recession, so keep that in mind going forward.

It's getting late as I post this, so I'm not going to do an in-depth post tonight. But I will be anxiously awaiting the job numbers in the morning. I have a rather ominous feeling about the unemployment rate given all that has transpired recently. But by the same token, I have to report that micro level data is mixed. Here in our county I've been hearing some good things about the number of jobs being created. If this is a recession, it's certainly not an ordinary one. More on that later.

***

I'll be getting back to a somewhat more regular posting schedule in the coming days. In the last 6 weeks, I taught an MBA course as well as tried to prepare some things for the fall and spend a lot of time with the family. But with the beginning of August comes a feeling of urgency to get back to work. And the blog, in a way, is tied to that as a reflection of what I read and think about.

So as I dig in and revise those macro principles notes before the start of the semester, I will try to pull myself away a bit more often. Hope your summer has been as enjoyable as mine has.

Of course I have tried to accomplish some things on my summer break as well. In addition to doing a little research, I sat down and knocked out another Mathematica demonstration. You can download it from the Wolfram demonstrations website.

This one was actually pretty easy to do. It's a neat way of looking at how the coefficients of the cubic total cost function affect the average and marginal cost curves. If you use it in class, let me know!

The day before John Palmer visited, we were down in the St. Louis area to do a Relay for Life with my in-laws. We raised some money to be a part of their team, and then spent just about the whole night on the track. I walked or ran all but 1/2 hour between midnight and 4am. Most of it was walking, but distance-wise I probably ran 6 or 7 miles and walked another 6 or 7.

Here's a picture of my son and I out on the track before the sun went down and before I changed into some better running clothes.

Wow, so that was July! Summer goes by too quickly, and sometimes the blog suffers for it. I sat down tonight and looked at the pictures from the last few weeks (my wife documents pretty much everything the family does) and was struck by how busy we've been this summer without really going very far from home. So that's where I've been. Mostly home, but often not at the computer.

But I got lonesome for the blog, so here we go.

Case in point for the kinds of things we've been doing close to home (with a picture!) would be when John Palmer (a.k.a. EclectEcon) traveled to Monmouth, Illinois--which is just 20 miles or so from here. He plays French horn for the Goderich Laketown Band, which played a few concerts in our area. The reason for their picking Monmouth had to do with one of the members of the Monmouth municipal band being from Goderich originally and his setting up of an exchange of bands. The Monmouth band will visit Goderich sometime in the future.

It was wonderful to meet up with John. I attended two of his concerts and to the final one I brought the whole family. My son enjoyed their last number especially. It was a medley from the movie "Cars". Here are a couple of pics from the event.

I say it was a meeting of bloggers because not only did I meet John, but also a friend of his that happens to live in Monmouth, Rebekah, who lives in Monmouth and has a lot more pictures.

The band is doing a good job as goodwill ambassadors. My wife is already talking about taking a trip there.