economy

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Who Is The Better Forecaster, The Economist Or The Climate Scientist?

I was looking at this wonderful chart from Business Insider and from Bloomberg LP Chief Economist Michael McDonough and wondered who was the better forecaster, the economist or the climate scientist. As we can see from the chart the GDP forecasts for the last couple of years are particularly bad. In four out of four years the forecasts start out 50% to 100% too high. That is impressive! Winking smile

GDP_optimism1

Here is my favorite chart from that other dismal science, climate science. Although this is not a fair comparison the climate scientists are wrong only 95% of the time! They win!

CMIP5-90-models-global-Tsfc-vs-obs-thru-2013a

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Did The Tail Wag The Dog In The First Quarter GDP Report?

I am puzzled why health spending had such a large impact on first quarter GDP report. I thought the Affordable Care Act impacted the health care expenditures for only a small part of the population. Other people are puzzled, too. The best article that I have found that partially explains the impact of health care spending on first quarter GDP is, “Health Spending and First Quarter GDP: What Happened?“, but it fails to explain why such a small component of the GDP had such a large effect.

When I get puzzled with economic data, I go over to FRED and plot some data. So if we follow Tyler Durden’s lead of plotting quarterly changes for health care expenditures and include the Real Gross Domestic Product series we get this graph. You can see that the quarterly change in GDP dwarfs the health care expenditures and it is hard to see much of a correlation between these two indices. Unless we are willing to believe that the tail can wag the dog, we have to conclude that the 2.9% decline in the economy was for economic reasons other than health care expenditures. The impact of changes in health care expenditures is still a minor factor in the GDP growth. The Affordable Care Act taxes are probably holding the economy back a little bit but if we want to grow the economy we have to do it the old fashion way by making things bigger, better, faster, or cheaper.

FRED Graph of Health Expenditure and GDP Quarterly Changres

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Who Would Have Thunk We Would Get A 2.9% Decline In GDP?

The latest report from Bureau of Economic Analysis is out and it was a shocker. I don’t think anybody except BizzyBlog saw a 2.9% decline. I was curious how fast the economy was growing on an annualized basis. Some folks expect the economy to grow at a robust 3% rate in the second half of the year. The Federal Reserve is slightly less optimistic and recently cut their estimates for 2014 to between 2.1 percent and 2.3 percent. Considering how big a hole the first quarter GDP decline put us in, it looks like we need three quarters of a 3.8% of compounded growth to get to the low end of their estimates. Based on recent history that looks difficult to achieve. Based on this same history I am in the 1.5% annual growth camp. When I look at the economy, it looks like more of the same to me. If my calculations are correct then three quarters of 3% compounded growth will overcome the first quarter and get us a positive 1.5% growth for the year and match last year’s growth rate. The nightmare scenario for the Administration and Democratic candidates is if we do not see 3% growth for the remaining three quarters of 2014. That rarely happens during an election year but you never know. This economy has been anything but predictable.

Table 1.1.3. Real Gross Domestic Product, Quantity Indexes
[Index numbers, 2009=100] Seasonally adjusted
Bureau of Economic Analysis
Last Revised on: June 25, 2014 – Next Release Date July 30, 2014
Line   2012 2013 2014 2014 vs 2013 2014 vs 2012
I I I
1 Gross domestic product 106.683 108.087 109.753 1.5% 1.4%
2 Personal consumption expenditures 106.145 108.138 110.324 2.0% 1.9%
3 Goods 109.298 112.928 115.923 2.7% 3.0%
4 Durable goods 119.195 127.379 133.093 4.5% 5.7%
5 Nondurable goods 104.988 106.762 108.661 1.8% 1.7%
6 Services 104.616 105.818 107.618 1.7% 1.4%
7 Gross private domestic investment 129.269 131.521 136.421 3.7% 2.7%
8 Fixed investment 114.569 119.467 123.408 3.3% 3.8%
9 Nonresidential 116.551 119.318 123.458 3.5% 2.9%
10 Structures 93.345 93.09 97.601 4.8% 2.3%
11 Equipment 139.204 143.175 147.134 2.8% 2.8%
12 Intellectual property products 108.83 112.648 116.698 3.6% 3.6%
13 Residential 106.359 120.123 123.35 2.7% 7.7%
14 Change in private inventories — — —
15 Net exports of goods and services — — —
16 Exports 122.576 123.781 127.308 2.8% 1.9%
17 Goods 125.88 126.126 130.47 3.4% 1.8%
18 Services 115.719 118.961 120.767 1.5% 2.2%
19 Imports 120.475 120.584 124.361 3.1% 1.6%
20 Goods 123.394 123.098 127.109 3.3% 1.5%
21 Services 108.248 110.197 112.96 2.5% 2.2%
22 Government consumption expenditures and gross investment 95.863 94.117 92.682 -1.5% -1.7%
23 Federal 100.115 96.315 92.523 -3.9% -3.9%
24 National defense 97.769 91.731 87.434 -4.7% -5.4%
25 Nondefense 104.409 104.74 101.873 -2.7% -1.2%
26 State and local 93.096 92.672 92.766 0.1% -0.2%
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Student Loans Is The ONLY Consumer Credit That Is Growing!

I was looking at the latest G.19 report from the Federal Reserve and noticed that the only major holder of consumer credit who increased their loans was the Federal Government. For people unfamiliar with this report, this is where the government reports its student loan holdings. It is probably too early to declare the consumer driven economy as dead and buried but you get the gist. It is hard to be optimistic about a growing economy in 2014 when the only folks borrowing money in February were students. Read it and weep!

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Thing That Make Me Go Hmm… Reflecting On Ohio’s Economic Turnaround

I was fascinated with the Fox News interview of Governor Kasich this morning. Chris Wallace asked Governor Kasich the following question.

You have engineered quite a turnaround at Ohio since you took office in 2011 and let’s put up part of your record. Your state has been the number five job creator in the nation over that period of time. And number one in the Midwest. Unemployment is now 6.5 percent. The lowest in your state since June of 2008. And Ohio has gone from an $8 billion deficit to a $1.5 billion surplus. Question: what is the secret to your success?

The alleged job creation performance was pretty amazing considering that the last time I looked at Ohio’s job creation performance I was not impressed. So I decided to crunch the numbers. I picked up the job creation numbers from the Job Growth Update page at Arizona State University and found that Ohio’s 2011, 2012, 2013, and 2014 job growth performance was definitely middling. They were ranked number 26,18, 25, and 33.  This was less impressive than the performance of Indiana which was ranked 5, 8, 40, and 20. So how did Fox come up with the optimistic talking point?

Since the question talked about jobs created, I put the data into a spreadsheet and calculated the actual number of jobs created. In this case Ohio ranked 7th since Ohio has a larger population than most of the states. However if we use this definition of job creation than the number one job creator in the Midwest is Illinois since it has the largest population in the Midwest. Hmm…

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Who’s Borrowing Now? The Young and the Riskless!

Last week I mentioned that “Student Loans Account for 59.5% of the Consumer Credit Added in 2013”. This week the New York Fed explains in the post, Just Released: Who’s Borrowing Now? The Young and the Riskless!, that the credit card borrowing grew for folks with high credit scores. Since the total credit card debt barely grew in compared to 2012 the increased borrowing by those with high credit scores was offset by reduced borrowing by those folks with lower credit scores.  This data leads me to believe that in 2013 this consumer driven economy was stuck in stall mode. Hopefully 2014 will be better. Their site has been up and down today so here is a copy of their chart.

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Change in Debt by Credit Score

For those folks who want to play with the data more you should take a look at the Fed’s interactive graphic or download the spreadsheet.

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What Would @planetmoney Say About The Job Losses Under The Affordable Care Act?

plantmoneyOne of the most contentious issues brought up by the Congressional Budget Office report on the Affordable Care Act is the job losses. It is by design that the Affordable Care Act allows people to choose to turn downsize their job and replace their employer sponsored health care plan with an equivalent one from the exchange. There are people who have valid medical or personal reasons who want to pursue this path. These are intentional job losses and probably desirable. The problem is keeping the people who really do not have a valid reason for downsizing their job from pursuing this strategy. As much as we might want to compassionately encourage the former group to downsize, we really want to discourage the slackers from going down this path. Unfortunately the Affordable Care Act does not really have a plan of disincentives for these prospective slackers. If we really believe we can grow out of our economic mess and pay for an expanded health care system then we must minimize the number of slackers.  Before the Affordable Care Act transforms our health care system in to a “Mini-Me” version of the European system, it may be a good time to revisit Planet Money’s podcast, Germany’s Painful Unemployment Fix, and Germany’s use of incentives and disincentives to bring down unemployment rates. It is ironic that the reforms that made Germany’s labor market look more like the labor market in the U.S. may eventually be adopted by us as our welfare state repeats the same mistakes Europe made. Oy vey!

For a more scholarly review of the impact of the ACA on employment you can read Rea Hederman’s article, ”Incentives Matter: Why Estimated Job Losses Under Obamacare Have Tripled” and University of Chicago economist Casey Mulligan’s paper, “Average Marginal Labor Income Tax Rates under the Affordable Care Act”.

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Things That Make Me Go Hmm… Startup-NY advertising in Ohio?

Migration Map 2010Recently Start-Up NY has been advertising heavily in Cincinnati touting New York as a great place to start a business. Cincinnati has a small but interesting start-up business. Most of the buzz has been about Cintrifuse. Although there have been some successes, no one has confused Cincinnati with the start-up meccas like Silicon Valley. Start-ups in Cincinnati and Northern Kentucky largely remain a work in progress. When we look from New York’s perspective the grass sure looks greener over Ohio’s septic tank. The recently released United Van Lines 2013 migration study press release says that New York has the third highest ratio of traffic moving out of state. The reason for the high outbound ratio is complicated but it is hard to ignore the business climate’s consistently low ratings. The 2013 version of the ALEC-Laffer State Economic Competitiveness Index has New York ranked 49th. The year before they were ranked 50th. So why would a budding start-up move from a state like Ohio who is ranked 26th to a state ranked 49th? Cincinnati may not have the cachet of Silicon Valley but it has a better business environment and a lower cost of living than New York.

New York has a difficult marketing problem and from their perspective at the back of the pack, the Cincinnati start-up market is a more appealing target to attract businesses from than Texas or California. Their plan is to create tax free zones in which “businesses can operate 100% tax-free for 10 years. No business, corporate, state or local taxes, sales and property taxes, or franchise fees.” This is an interesting offer but it is restricted to areas located primarily on SUNY campuses around New York City. Their idea was to pair up high tech businesses, low taxes, and college campuses. This might eventually work with Columbia university but I am skeptical of its usefulness at the SUNY campuses. Even if this plan happens to be successful at a major university, what is going to stop Kentucky and Ohio from setting up similar plans at the University of Cincinnati, Xavier, Miami, or Northern Kentucky? In the grand scheme of job migration their plan is a nice employment solution for high tech, college students but it really does not address the much larger unemployment problem with the low education, low skill job market. They may save a few jobs for college graduates but the rest of the people are going to have to look for jobs elsewhere. To fix that problem we have to learn how to grow low and medium tech companies again. We tried to fix the problem by encouraging the growth of the service industries at the expense of manufacturing companies. Now we have learned that the service industry is not the magic bean that will grow the low education, low skill job market. “To grow middle class wealth you must be making things bigger, better, faster, or cheaper.” That will take a different mindset. A mindset that made New York city great a long, long time ago.

When I think of New York City I think of this poem. From huddled masses to high tech college students, it is amazing how the vision of who we are has changed. It is hard to embrace a return to the optimistic vision of the poem when a poor business climate is undermining that vision at every turn. In a very provincial sense I feel like Samuel Gerard in “The Fugitive” who kept telling Dr. Kimble, “I don’t care”. I have a job to do, New York has a job to do, and it is very likely that never shall the twain meet. I hope local start-ups will look at the numbers and stick with Cincinnati. That is the smart decision. Regardless of their decision my life is unaffected. However there is a deeper issue in play. Like Samuel Gerard who finally admits that he does care, I want New York to be successful again.  When I root for New York’s success I am not rooting for a more optimistic future for all of us and the success of New York is part of it. I am rooting for the unbridled optimism of the poem.

Give me your tired,
your poor,
Your huddled masses
yearning to breath free,
The wretched refuse
of your teeming shore.
Send these, the homeless,
the tempest-tost, to me,
I lift my lamp beside
the golden door!

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Things That Make Me Go Hmm… The Continuing Bull Market

I have been unwilling to invest more money into the stock market for the last couple of years because the stock market has this uneasy, codependent relationship with the expansion of the Fed’s balance sheet. Every time the Fed threatened to cut off the purchases the stock market had a temper tantrum. I hate this market psychology. As an old school MBA type I am much more comfortable with a market that goes up when the unit sales goes up. As a result I missed out on the stock market gains in 2013. Jeff Sauts makes a very good argument on BussinessInsider that the stock prices will continue to go up for the same reason it has since 2009.

…there has been a very tight correlation (R2) between the expansion of the Fed’s balance sheet and stock prices since 2009. If the Fed expands its balance sheet by another 12% over the coming year, it is conceivable the SPX could increase by another 12%

His argument is solid so despite my qualms I will probably test the investment waters in 2014. I would be much more optimistic about investing in the stock market if our government was reducing the policy risk on small and medium sized businesses. This is MBA advice you would have gotten in the 1980s. The government needs to get out of way so businesses can get back to their running their business. The Affordable Care Act and the increased regulations are a distraction that has increased the risks to small businesses. It is hard to grow your business with all of these meaningless distractions. I have said it before. If we want to grow middle class wealth we have to focus on making things bigger, better, faster, or cheaper.