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Policy Hub: Macroblog provides concise commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues for a broad audience.

Authors for Policy Hub: Macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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June 3, 2007

Taking It Slow

The recent spate of relatively good economic news has some people thinking rosier scenarios.  From the Wall Street Journal (page A3 in yesterday's print edition):

The latest data show employment and manufacturing growing at a vigorous rate, suggesting the U.S. economy is regaining momentum after a slow start to 2007...

Nonfarm employers added 157,000 jobs to their payrolls in May, nearly double the 80,000 new jobs recorded in April, the Labor Department said Friday. Led by the service sector, the rebound brought the three-month average job gain to about 137,000, a pace strong enough to keep unemployment low and wages rising. The unemployment rate held steady at 4.5%.

Meanwhile, the Institute for Supply Management, a purchasing managers' trade group, reported that its index of manufacturing activity came in at 55 in May, up from 54.7 in April, indicative of expanded factory production. That is a stark contrast to earlier this year, when manufacturing activity was contracting.

Economists saw the reports as confirmation that the economy is regaining momentum despite the pain that high gasoline prices and the housing slump are inflicting on the consumer...

How quickly the economy rebounds will depend to a large extent on how U.S. consumers, whose purchases make up more than two-thirds of all economic activity, respond to the conflicting influences of high gasoline prices, falling house prices, a robust stock market and rising incomes. Friday, the latest reading on the University of Michigan's consumer sentiment index suggested they were still in relatively good spirits: The index rose to 88.3 in May from 87.1 in April.

It does feel like we've gained a little breathing room, but this picture sticks in my mind:




That second quarter of 2000 should remind us that it sometimes looks pretty sunny before the storm.

May 21, 2007

Why Do We Have Money?

UPDATE: The broken link is fixed.

From the Cleveland Fed:

Think about a dollar bill.

If you’re hungry, you can’t eat it; in a rainstorm, it won’t keep you dry. But you can trade it for an apple or an umbrella. If you lived in a world without money, how would you get the things you want and need?

Play Escape from the Barter Islands to find out!

If you are a young student, a teacher presenting economic concepts to young students, or simply someone who feels like a young student, give it a shot.

May 17, 2007

Soft, Not Too Soft

This morning's email from the Goldman Sachs Global Markets Research Group contains this assessment:

The recent industrial news, including April US industrial figures yesterday, have been positive, especially as it reduces the probability of one of the tail risks in the market, i.e. too soft growth. Nevertheless, we think the market remains too optimistic about US growth trends going forward.  This is highlighted in the current Blue Chip Consensus, which shows US GDP growth rebounding from 1.3% in Q1 (which as the US Daily discusses overnight is likely to be revised down) to 3% as soon as second half of this year.

If our US growth views prove correct, the market may yet need to revise down its growth expectations. In that regard, it is striking how growth expectations in the equity markets (as captured by our Wavefront US growth basket) have continued to grind higher. 

So, while we are comfortable with our view of a US soft landing, markets may need to adjust to a less optimistic macro reality than is priced in. This potential downward adjustment could prove to be one of the several road bumps for risky assets in coming quarters.   

Not everyone will have to revise down those expectations.  The economists queried for last week's Wall Street Journal forecasting survey seem to (at least broadly) share the Goldman view:

On the whole, the 60 economists predict gross domestic product, the broadest measure of economic output, will grow at a 2.2% annual rate this quarter. Over the second half, they expect growth of about 2.6%, which is a slight reduction from what they had forecast in a survey conducted last month. They don't expect growth to reach 3% until the second quarter of 2008.

Certainly the voices of Fed chairs past and present, while not endorsing a particular forecast, are aligned with the no-tailspin crowd.  From Bloomberg:

The Fed chairman maintained his forecast that the slump in housing won't have a broader impact on the economy. "We do not expect significant spillovers from the subprime market to the rest of the economy or financial system,'' Bernanke said.

Fed officials this year have cited the housing recession as a main risk to growth, which was the weakest in four years last quarter. Bernanke's comments today reflect the consensus of policy makers that the downturn in housing is unlikely to cause consumers to cut spending. Former Fed chief Alan Greenspan also said that subprime problems aren't spreading to lower-risk loans.

"The prime market is doing reasonably well,'' Greenspan, who retired in January 2006, said today at a meeting hosted by the Atlanta Journal-Constitution in Atlanta. "Some people are holding off on purchasing homes. Even so, we are getting a gradual rise in the prime market.''

Meanwhile, the rest of the world seems to be doing pretty well, thank you.  Back to the Goldman boys:

We do not expect the prolonged period of sub-trend US growth that we foresee to cause major problems for the rest of the world. Recent data has shown further evidence of global decoupling with softer US economic news on the one hand (soft retail sales), and robust growth dynamics in the rest of the world, particularly in Europe and China (Q1 GDP growth in Euroland was above consensus and the April activity data for China have been strong).

However, this begs the question of how bad it would have to get for the global decoupling theme to unravel?

In our latest Global Economics Weekly, we extended the spill-over analysis we conducted last year to study the growth experience of other major economies (Japan, Germany, UK and France) conditional on whether US economy is contracting (i.e. real growth on qoq terms is negative) or expanding (i.e. real growth on qoq terms is positive)...

... Overall, our analysis supports our thinking that as long as US growth remains in expansion mode (which we forecast), other major economies should be able to decouple.

According to a report in todays the Wall Street Journal, some rather astute folks think it may be the other way around:

Early last year, [chief investment officer at Pacific Investment Management Company William H.] Gross's outlook for the U.S. bond market hinged on housing. "We did our homework," he says. "We sent out scouts into middle America, down to Florida." They did make some correct calls, such as predicting a drop in long-term interest rates last summer.

What Pimco didn't foresee was the impact on the U.S. of the strength in the global economy, led by China and the rest of the Asia. Mr. Gross says they recognized there was inherent strength abroad. But they counted on issues such as the U.S. trade deficit and increasing leverage around the world to have "snapback potential like a rubber band" that would restrain growth and allow the Fed to lower rates. That didn't happen.

Either way, the soft-landers appear to be feeling their oats.

May 16, 2007

The Wisdom Of Forecasting Crowds (Such As It Is)

Ever wonder who you should turn to for expert economic prognostications?  My colleagues Mike Bryan and Linsey Molloy (future Chicago MBA!) remind us that the answer is everybody and nobody:

... we examine economists' year-ahead growth and inflation predictions since 1983 to see whether any have distinguished themselves as particularly good (or bad) forecasters over time.

We find little evidence that any forecaster consistently predicts better than the consensus (median) forecast and, further, we find that forecasters who gave better-than-average predictions in one year were unable to sustain their superior forecasting performance—at least no more than random chance would suggest.

Not that consensus forecasts are all that great:

... we summarize the track record of the median economist’s year-ahead predictions for real GDP growth and CPI inflation since 1983. (Forecasts were compiled by the Livingston Survey.) If we arbitrarily define an accurate prediction as being within 1/2 percentage point of the realized outcome, we would say that since 1983 the median forecast was accurate in only seven years, or about 30 percent of the time... The accuracy of the median forecaster’s prediction of inflation was a bit better over the 23-year period. Inflation predictions were accurate—that is, within 1/2 percentage point of actual inflation—39 percent of the time...

... So suppose the median forecaster expects the economy to grow 3.4 percent next year (its average since 1983). You could conclude—with 90 percent confidence—that the economy will grow between a robust 5.8 percent and a sluggish 1 percent. Similarly, the RMSE of the median economist’s inflation prediction over this period was 1 percent, which means that given an average inflation rate of 3.1 percent, you could be about 90 percent confident that prices will rise between a stable 1.4 percent and an uncomfortably rapid 4.8 percent over the coming year.

Fair warning, I think.