Tag Archives: forecasts

A secret of the new business cycle, & why good predictions have become so rare

Summary:  This post looks at the recent economic data, but not to convince you about the rightness of my forecast (more slow growth), but rather to help you make sense of the river of economic data the modern media brings us. As a bonus you’ll learn the secret of the new business cycle. (1st of 2 posts today.)

Economic forecasting has become much more difficult in the era that began in 2000.Wheel of fate

We get so many confident forecasts about the economy. Some bullish, some bearish, most wrong. On the fringes of the investment industry we get people boasting about their insights, with mockery of mainstream economists, and conspiracy theories about the government’s data to explain their failed predictions.

Nor have mainstream economists won much glory. They correctly called the recovery after the strong stimulus programs began in early 2009, but have consistently and wrongly expected “take off” to “normal growth”.

After 6 years with multiple bursts of massive government stimulus, the US (and perhaps world) economy lives in crazy town. The numbers bounce around in an ever-changing nonsensical pattern of activity. The textbook business cycle clock is MIA. At the top of the swings the bulls are wrong; at the bottom the bears are wrong. So it has been this year. Economists expected a strong start with 3% in Q1, we got near-zero (which might get revised to down) — accompanied by the usual wave of bad data.

This month’s numbers have been mixed, but with two kinds of strong results. Good news, like the decent jobs growth. And great but fake news like that the Wall Street Journal (and other news media) reported this week: “U.S. home building surged in April to the highest level since before the recession officially began, a sign of thaw in the housing market during the crucial spring selling season.” It’s an example of why we know little: because we read the news.

FRED: Housing Starts

As you can see, single family home starts “surged” by reversing their dump in March. April’s starts were almost identical to those in November 2013 and December 2014. The trend is slow growth.

By “highest since the crash” they meant rising to 40% of the pre-crash peak (and roughly half of the rate during the late 1998-2002 period). Including multi-unit homes gives the same picture.

Freight activity indexes

Instead of looking at the various sector indicators, let’s look at something more central. Nothing is more central than transportation, with multiple measures giving hard data in relatively real time. We cannot have accelerating growth without something moving fast — raw materials, imports, exports — something. The indexes draw a mixed picture, consistent with the rest of our messy data.

From the Department of Transportation we get the seasonally adjusted Freight Transportation Services Index, measuring the volume of freight carried in the US. In March it was 0.4% below its peak in November and up 3.1% YoY (Year over Year). That’s consistent with GDP and most other data.

FRED: Transportation Services Index

For more current but narrower data we turn to the American Trucking Associations we get an index measures tonnage (seasonally adjusted) carried by trucks in the US.  The index peaked at 135.8 in January 2015. In April the index fell 3% to a 12 month low of 128.6 (2000=100), down 5.3% from January and up 1.0% YoY. Bad news from a volatile metric.

The Business Cycle

Conclusion

I often wonder what laypeople get by reading the financial news. It’s presented as a kaleidoscope, bewildering in its abundance, usually devoid of useful context, largely a scaffolding on which analysts and journalists hang their narrative (which often contradicts the data). What do people get from reading this daily flow of factoids?

In a sense it’s always been so, but the strong cyclical aspect of the economy — the business clock — kept people’s narratives somewhat synchronized with reality. Six years of erratic slow growth sustained by bursts of government stimulus have allowed both bulls and bears free reign of their imaginations. Government stimulus plus weak growth means imminent depression, if not collapse of the dollar and perhaps civilization. Or the successful stimulus programs laid the foundation for years of powerful economic growth.

Perhaps both sides have become exhausted. With stock market valuations at nosebleed levels and gold far below its peak, the bears are either endangered or no longer bet their beliefs. The slow steady decline of economists’ long-term growth expectations (e.g., of the Fed Open Market Committee) show the bulls enthusiasm has faded as well.

What’s the secret of the new business cycle? The secret is that there is no business cycle here, just a long chaotic transitional period that began on Y2K (the real significance of that date). I believe the erratic nature of the economic data is the tell. We should be watching the data not to predict the next tick (always difficult, now impossible) but to see the emerging new economic regime when it emerges. Until then almost anything can happen. Perhaps good. Perhaps bad.

“Unless you expect the unexpected you will never find truth, for it is hard to discover and hard to attain.”
— Heraclitus, the pre-Socratic “Weeping Philosopher” of Ionia.

For More Information

If you liked this post, like us on Facebook and follow us on Twitter. See all posts about economics, about markets, and especially these about our slowing economy:

  1. How close are we to the next recession?
  2. Updating the recession watch; & what might the government do to fight a slowdown?
  3. Economic status report: good news plus chaff from doomsters.
  4. Economics gets interesting as the economy darkens while stocks bubble.
  5. Today’s forecast for the US economy & stock market: cooling, perhaps with storms.
  6. What does our surprisingly slow economy in Q1 tell us about the future?
  7. Update about the economy: slowing, vulnerable, in a strange space.
  8. About our slowing GDP: are we near a recession? are the models accurate?

The Trevor Greetham (Fidelity) Investment Clock

It worked in the post-WWII era that ended around Y2k.

Trevor Greetham (Fidelity) Investment Clock

Trevor Greetham (Fidelity) Investment Clock.

 

 

About our slowing GDP: are we near a recession? are the models accurate?

Summary: Some good news about the US economy, and a cautionary note about popular investment advice. It’s a bit technical, but explains important matters seldom mentioned.  (1st of 2 posts today.)

World Models

Investment experts bombard America with forecasts, picking from the flood of data those tidbits that fit their views, often shown without context. It’s motivated reasoning, an easy path to plausible and entertaining but false reasoning.  For example, the weak Q1 GDP has excited the bears, as has the Atlanta Fed’s GDPnow model’s forecast of only 0.7% SAAR GDP in Q2 (since it’s giving bearish forecasts, bears have deemed the GDPnow model the next Einstein). That’s far below the consensus guess of 2.5%, per the Fed’s May 15 survey of professional forecasters.

In his May 13 report Ethan Harris, economist for Bank of America, explains the situation, discussing the difficulty of forecasting GDP, the various models economists use, and the consensus confidence that US growth will accelerate from the near-zero Q1. Excerpt…

Hot hand

For the second year in a row, economists have come into the first quarter forecasting 3% GDP growth, then lowered their forecast to about 1% by the end of the quarter, only to see a roughly flat official release. By contrast, the GDPNow model from the Atlanta Fed “nailed” the latest quarter, predicting almost exactly the 0.2% advance estimate. Looking ahead, the model predicts just 0.8% for 2Q, compared to a 2.9% consensus. Should we be worried?

The short answer is: “not really.” The GDPNow model actually has a slightly worse forecasting record than both BofAML and the consensus over the last several years.

Casting for a better forecast

In recent years economists have developed increasingly sophisticated models for
estimating GDP in real time. … The Atlanta Fed takes a more high tech approach. Without boring the reader, their initial forecast each quarter is based on a “Bayesian Vector Autoregression (BVAR)” — basically an elaborate extrapolation of recent trends in the data. They then feed in hard data for the quarter as it is released and modify the forecast accordingly. While their model was spot on in the latest quarter, its real-time forecasting record is slightly worse than both our own and the consensus. …

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Update about the economy: slowing, vulnerable, in a strange space.

Summary: Today we take another look at the US economy. The indicators paint a clear picture of an economy slowing, vulnerable to recession, in a strange space. A recession could become ugly; don’t expect a return to normality.  Overall it’s a boring picture, hence its widespread misrepresentation in the investment media as either wonderful or bleak (they give us the news we want).   {1st of 2 posts today.}

Economy

Contents

  1. The big trends
  2. My favorite indicator, a window onto the world
  3. Waiting for the return to normalcy
  4. For More Information

(1)  The Big Trends

The bears say that we’re in a recession. But then they so often say that, at least since the crash. Let’s look at the data. The picture shows bad news — for those earning their bread by telling you lurid stories about the economy. Let’s look at a typical graph: the percent change year-over-year in non-farm jobs, not seasonally adjusted (not needed, since we’re using YoY numbers).  It shows boring slow growth. The opposite of clickbait.

FRED: non-farm jobs YoY, NSA

The number of jobs provides too narrow a window on the labor market to tell us much. For a wider view we can turn to the Fed’s Labor Market Conditions Index, combining 19 indicators in a complex model. An exciting reading of -2, until you realize that zero is the average.  It shows slowing — as many indicators do now, but the data doesn’t justify the Zero Hedge headlines saying that we’re in recession.

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As boomers retire they create a drag on US GDP that will last for decades

Summary:  The Boomers have begun retiring. They’ll inflict economic stress on America in ways few expect, and so for which we’ve not prepared. This post looks at one such, the long headwind to economic growth created by their falling spending.  {1st of 2 posts today.}

Baby Boomers' Social Security card

Contents

  1. The Age Wave.
  2. The Boomers’ retirement is coming.
  3. Conclusions.
  4. For More Information.

(1)  The Age Wave

The retirement of the Boomers is a major event already started yet still underestimated. It began in 2008 with the first boomer taking early retirement on social security, and will continue until the last year of boomers take normal retirement in 2031. The spending drop as they retire will create a headwind for the economy throughout those years. We’re misled about what to expect by the successful retirements of their parents, the “greatest generation”.

The greatest generation had VA mortgages for their homes, VA health care, corporate pensions, the strong post-WWII economy to boost their savings, and a strong real estate market to boost their wealth. Their spending drops roughly 15% at retirement, and continues to drop only slowly thereafter (source surveys).

The Boomers had corporate downsizing, elimination of corporate pensions, few with veterans’ benefits, stagnant real wages, shrinking real minimum wages, the shift to part-time and no-benefit jobs, and with high interest rates for much of their adult life. They will enter retirement with debt loads that have no precedent in history, and low savings. The different will create a far sharper drop in spending for the Boomers at retirement than for their parents.  Plus, there are 76 million of them, 1/4 of the US population — so the effect will be substantial.

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The IMF warns us of economic stagnation & suggests fixes. We should listen.

Summary: Today’s post looks at an important new report about the IMF, another step by economists towards recognition that we’ve left the post-WWII order for a new world. Now that’s a world of persistent slow growth, in which repeated rounds of fiscal and monetary stimulus (conventional and unconventional) prevents recessions but cannot reignite strong growth. The IMF’s economists discuss possible causes and solutions.  {1st of 2 posts today.}

Slow Economic Growth

Contents

  1. The IMF discovers secular stagnation.
  2. Slowdown since the crash.
  3. What comes next?
  4. What should we do?
  5. For More Information.

 

(1)  The IMF discovers secular stagnation

One of the great issues of our time concerns our future. Do we face continued slow growth (aka secular stagnation) or the accelerating growth of a new industrial revolution? These paths offer different challenges and require radically different central bank policies.

But central banks have been unable to prepare for either alternative because they’re stuck in the first — and often the most difficult — phase of the problem resolution process: recognition. Since the crash they’ve expected economic growth to return to normal. Year after year they’ve been disappointed, responding to a series of ad hoc improvisations that have poor grounding in economic theory and history. Yet time brings insight, and the international economic agencies have slowly come to grapple with these questions.

This post looks at the April 2015 IMF report “Where Are We Headed? Perspectives on Potential Output“.  Here’s a summary for a general audience from the IMF’s survey magazine. They open by comparing forecasts made in 2007 and 2008 with actual economic growth through 2014. Slowing, slowing, slower.

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A look ahead at the New America, after the gender wars

Summary: Before we start this series speculating about our new society as gender roles change unrecognizably, I’ll reverse my usual procedure and give the conclusions at the beginning. The early signs of these things have already appeared, but most readers will be shocked — and many will be horrified.  {1st of 2 posts today.}

“Always in motion is the future.”
— Yoda, Jedi-Knight.

Gender Roles

An outline of this series

A combination of social evolution and technology — with complex feedbacks between them — has greatly changed gender roles during the past 150 years, and the process has just begun. We can only guess at possible outcomes ahead from trends already running, which is what we’ll do in this series.

I believe that women will continue to outperform men in education and therefore taking an increasingly powerful — and eventually a dominant — role in the professions, business, and politics. Accelerating this trend will be their natural advantages in bureaucratic organizations (from classroom to boardroom) as the weight of sexism fades.

In such a world fewer women will be able to marry up (aka hypergamy) as the balance of power shifts in their favor, putting further stress on the institution of marriage and the nuclear family structure.

As patriarchy dies marriage will offer ever fewer benefits to men. They’ll compare the  consequence-less sex so easy available without marriage — with the burden of marriage, raising children, doing half the housework — and the high odds of one’s wife initiating divorce, taking the kids, and levying a decade or two of child support payments. At home paternity tests might increase their cynicism about the institution, as 2-3% of men discover that they’re not the biological father of their children. These things will wreck the already decaying structure of the nuclear family.

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Today’s forecast for the US economy & stock market: cooling, perhaps with storms.

Summary: Today we have another briefing on the US economy and stock market. The situation grows darker, cliffs might lie ahead, but it’s still too soon to say more than that. Read on to learn the details.  {1st of 2 posts today.}

Economics

This is a new economic regime, profoundly different than the post-WWII era. Many of the relationships we used to navigate by have changed, as things considered extraordinary have become normal (e.g., long periods of zero interest rates and even negative rates). Yet there are warning signs with a long history of accuracy.

Don’t be comforted by economists’ optimism; many studies have shown their unreliability (especially their inability to foresee recessions). Listen instead to the 30 central banks that have cut interest rates this year, showing their true view of the situation.

For clear advice I recommend reading Albert Edwards of Société Générale, among the most insightful of investment strategists. In this from his 12 February report he gives the essential facts about our situation:

The market seems pretty convinced that the Fed will tighten in the middle of this year and maybe it will. Certainly the labour market is tighter and the Fed tells us that the recovery is well established. But, the Fed always spins a bullish yarn. Their track record of over-optimism is only surpassed by the appalling record of private sector forecasters – most especially in forecasting recessions. A rate hike this year when deflation pressures are intensifying could go down as big a policy cock-up as the BoJ raising VAT {valued-added taxes} in 1997, triggering recession, or the ECB tightening rates in July 2008 when the global recession was already well underway!

His report on 26 February updates that with the missing part of the equation: bad news. US economic data has grown worse since he wrote this.

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