Why can’t economic forecasters act like weather forecasters?

If economic forecasting is more akin to weather forecasting, (in accuracy) why wouldn’t economic forecasters practice the same presentation styles as weather forecasters? That is, given any usual business news (or even national and local news), economic forecasters present economic forecasts that resemble the presentation styles of weather forecasters.  It would include clear and concise explanations from a relatively attractive, well-spoken  person (don’t think actual economists like that exist) who can dictate changes in forecast trends for the economy who is aided by a green screen, supplying graphical information to aide in making their point. I could see this being viable on a business news network, where viewers are more economically literate.

How much credence would viewers give towards economic forecasters than weather forecasters? Much like climatologists who are a huge step away from meteorologists, are traditional economists a huge step away from forecasting economists? Both disciplines may be a few and far between in practice, but actual consumers of forecasts don’t let the difference phase them. As much as most still watch the weather, many still pay attention to economic forecasts. (For one, clients pay attention to mine.)

Would this ruin the perceived legitimacy of economic forecasting? In other words, is the ramification of being wrong more costly? Betting on good weather may result in the unfortunate situation in which one is with wet clothes, but much like the housing crisis, betting on economic forecasts may leave one underwater.

HT: Chartporn (for Picture above)

Unemployment Insurance Claims Not Letting Up

From Calculated Risk, a graph including today’s release of unemployment insurance claims:

Everyone thinks that this is terrible news, that unemployment insurance claims are not letting up. But take a look back during the tech boom recession, claims didn’t let up for a long time either. Given the severe magnitude of this recession, we won’t see any easing of unemployment insurance claims back to pre-recession levels for a very long time. Some structural employment issues at play may even cause claims to bottom out much higher than had previously in the boom times. A more dynamic labor market may be in order if hiring rates peak at a point that would offset claims, and that would mean that with a little more context, the issue isn’t as bad as we see it. Ups and downs should be expected.  This is really an issue of scale, and the severity of our recession has skewed our benchmark.

More on the positives of the European Crisis

Via Mark Thoma, a more well written thorough (fact backed) perspective on the net positives for the European crisis: here.

Bottom Line:  The European crisis, by keeping US interest rates in check and oil prices low, may do more to help the US recovery than hurt it.  In the process, however, we would expect the flip side of the resulting capital inflows into the US to emerge – namely, a rising external imbalance.  Arguably, this simply shifts the ultimate adjustment to sometime in the future.  Again.

Same ideas, but I published first!

Seeing the Positives from the European Debacle

What happened in the stock market two weeks ago was scary: the Dow dropped 1,000 points in a matter of minutes.  Greece was on the brink of defaulting on it’s debt; a country I might add, that has it’s currency denominated in Euros.   Investors were worried that if Greece went down, it might drag down the Euro with it.  Luckily, the EU finally pushed politics aside and realized that in order to keep the EU from causing a European Lehman chain reaction, they had to bail out Greece.  If Greece went, so the saying goes, the rest of Portugal, Italy and Spain would go with it.  As the bail out was announced, U.S. stocks surged.  But the damage was done.

Stocks are still up since a year ago, but a lot of that equity was lost.  Some say it was a much needed market correction.  In a way, I agree.  Investors started to feel that they were being left out of the party (considering that stocks rallied considerably since March 2009) and wanted to get into the action, driving up valuations.    The market correction has left some worried that the lost momentum from the stock market and the teetering European situation means that the U.S. is going to lose steam in it’s recovery.  But it won’t; it will only make our recovery stronger.  There are several positive indications that Europe’s struggle is in America’s benefit.

1. A stronger dollar against the Euro should help bring in an influx of investment.  While a weaker dollar sent investors over seas, most wealth generated outside of the U.S. will start seeking to invest here.*
2. The Fed funds rate is still around 0% to .25%.  Inflation hawks are going to have to start rethinking their position as deflationary pressures continue to rear its ugly head.  Mean trimmed CPI is on a downward trend, and with energy and commodity prices pointing lower, it will only continue to send overall prices downward.   This type of environment will keep the Fed from raising rates, making borrowing cheap.  With mortgage rates continuing to be low, buying a house is still attractive.
3. The potential benefit for having low interest rates is that foreign investors looking for returns will look towards equity markets.  This means more potential growth for U.S. companies and the stock market.
4. The stock market wasn’t the only thing that experienced slides.  So did commodity prices, especially oil.  Oil was moving up to around $90 a barrel until the market correction happened.  Now, oil prices are down to $75 a barrel.   Any increase in gas prices is taxing on consumers, but so far, gas prices have stagnated and won’t be increasing any longer.  The cost of inputs are now lower across the board thanks to declines in commodity prices, providing cushy margins for companies that lowers the pressure to raise prices, resulting in an absence of pain for the consumer.

As you can see, there is upside to the European situation.  I agree that it is still a gloomy situation for Europe in general.  Greece (and the like) face long-term structural issues that will make resolving their situation an incredibly hard task and I won’t be surprised if in 6 months Greece begins to default on its debt again.  But will it really drag down the EU? The rest of the countries such as Portugal, Spain and Italy should benefit from a lower Euro, helping wages that outpace productivity come to parity.  So should Germany and the rest of Europe, as a lower Euro will stimulate exports.  What needed to happen was a devaluation of the Euro  to a value more inline of what it is worth.  Yes, it is unfortunate that these irresponsible countries are essentially a drag on the EU, but that doesn’t mean the U.S. will have to suffer for it.

While the EU is a major trading partner to the U.S., I doubt there will be significant drops in demand for U.S. goods. There are more, higher growth areas for the U.S. to consider.  In terms of the U.S. recovery, if exports were the upside to the U.S. downturn, then U.S. exports to Europe is going to be the downside to the U.S. recovery.  But there is going to be a recovery nonetheless.

*And in minutes, this pops into my RSS reader: China boosts holdings of US Treasury debt by 2 pct

The next growth area for the economy

The optimism is rushing in as the new cadre for the future of the American economy, most of which was given a lift thanks to the new employment numbers for March.  While many report on the green shoots that help point to the one, rosy conclusion there still remains the question of where our growth will come from. From Slate, an article on “Why the U.S. recovery will be bigger, faster, and stronger than economists and politicians expect” gives a clue as to what the next new growth area for the economy will be: infrastructural efficiency.

In the short term, the ruthless pursuit of efficiency translates into the uncomfortable—and unsustainable—dichotomy of rising profits and falling employment. But the focus on efficiency is creating new business opportunities for smart companies. At BigBelly Solar, a Needham, Mass.-based firm whose solar-powered trash compactors reduce the need for both labor and energy, sales doubled in both 2008 and 2009. “Cities and institutions like universities and park systems are eager to do more with less,” says CEO Jim Poss. Leasing 500 compacting units has allowed Philadelphia to cut weekly pickups from 17 to five and will save it $13 million over 10 years. BigBelly employs fewer than 50 people, but like many businesses in fast-growing markets it indirectly supports a much larger number of jobs. At Mack Molding, an Arlington, Vt., contract manufacturer, 35 workers are kept busy on two shifts producing compactors. “When you add the employees at the more than 50 component suppliers, this work is supporting another 180 jobs,” says Joan Magrath, vice president of sales and engineering at Mack Molding. BigBelly compactors, which are entirely made in the United States, have been exported to 25 countries. It’s a drop in the bucket. But thousands of start-ups and small businesses are trying to crack the markets developing at home and abroad.

The value added is obvious. More waste can be processed at a lesser cost.  In the case of Philadelphia, the $13 million dollar savings can now be allocated to provide more value regarding something else, providing more momentum for growth in either the public or private sector.  While traditional waste handlers may be out of a job, the article notes that much higher skilled, production jobs are created in order to produce the automated receptacles.

The short-coming of this article is that it doesn’t delve any deeper into the potential that efficiency systems like this can create for the economy.  This blog has detailed some incredible ideas at maximizing efficiency, either by finding value in waste or building economies of scale.  The author misses how important infrastructural efficiency will be for the economy, especially since a lot of this efficiency will result in energy savings, usually not propelled by cost, but towards providing a greener future.  The more value we can squeeze per unit of (insert labor or widget here), the higher productivity the U.S. will enjoy which will entail higher income per individual.

Don’t dismiss the average oil price

From Environmental Economics:

Globalisation and the Environment: Peak Oil Man discovers economics!

“Peak Oil” and the peak oilers associated with this idea are a strange bunch. It is interesting to note that the daddy of peak oil has suddenly realised that “economics” might have something to say on this matter.

Economics is sometimes a little more subtle than supply and demand. Behaviour is the key.

Peak Oil Man Shifts Focus To Peak Price, Demand [World Environment News]

The economic shock of global recession has led a prime exponent of the theory conventional oil output has peaked to shift his view of the consequences, but he still thinks the world has to go green.

Retired petroleum geologist Colin Campbell, who worked for major oil companies as well as smaller firms, has long been associated with the belief the world’s oil supplies are dwindling.

He does not waver from that and dismisses the argument of the so-called optimists that technology will manage to keep eking out more and more oil to keep pace with rising demand.

What has changed is his opinion of the price impact and implications for fuel consumption after the spike of July 2008 to nearly $150 a barrel was followed by world economic recession, a deep drop in fuel use and a crash in oil futures to just above $30 in December 2008.

“I have changed my point of view about future prices,” said Campbell, who used to think the peak in conventional oil production, which he believes happened in 2005, would lead to a relentless price surge.

Oil prices may get too high to the point where it puts a strain on the economy and may push it towards recession, depressing prices of oil towards decade lows, but one shouldn’t dismiss the average price of oil over the last century, which has significantly increased. If there was something that Campbell underestimated about peak oil it is that as the average price of oil rises, the allocation of consumption towards cost effective substitutes helps depress average oil prices lower. Campbell is underestimating capitalism’s flexibility. But, he is right that the average price will still continue to rise. We will know when oil has reached it’s highest price when the market mechanism allocates more consumers toward cheaper alternatives.

Where the U.S. stands on the Laffer Curve

From Greg Mankiw:

Taxes/GDP x GDP/Person = Taxes/Person

Here are the results for some of the largest developed nations:

France
.461 x 33,744 = 15,556

Germany
.406 x 34,219 = 13,893

UK
.390 x 35,165 = 13,714

US
.282 x 46,443 = 13,097

Canada
.334 x 38,290 = 12,789

Italy
.426 x 29,290 = 12,478

Spain
.373 x 29,527 = 11,014

Japan
.274 x 32,817 = 8,992

Inflation? What Inflation?

From Free Exchange

Senate passes jobs bill

So the Senate just voted on the jobs bill and it is now going to Obama.  I predict with a 99.87% certainty that Obama will pass it, only so that he can push it aside to get political points while getting to bigger business for the next session of congress.  Here is what the bill will offer: (bullet points added, from NYT)

• …businesses that hire workers who have been jobless for at least 60 days will be exempt from paying the 6.2 percent payroll tax on those employees’ earnings until the end of the year. If those workers stay on for a full year, businesses will also get a $1,000 tax credit. (The employee’s pay would still be subject to the usual personal income taxes.) The business tax breaks would add up to about $15 billion in all.
• It also provides an extra $20 billion for road and bridge construction and extends the federal highway program through year-end.

And that’s it. $30 billion in corporate tax breaks is soon to follow, which is probably being pushed by Dems in order to compliment the oddly restrictive, albeit mildly effective hiring incentive.

But where is the investment tax credit Obama said he would like to see when he gave his State of the Union address? This bill won’t do much for employment as much as we hope.  Construction spending is only expected to ease some of the pain for construction workers on federal contracts.  Of course I can’t quantify what this will do. (I will look out for it) I know that at this turning point in the economy, with productivity up and a lot of pent up need for hiring, an investment tax credit would definitely stimulate demand.  Weak demand is the reason that’s keeping employment from taking off.

Quick note on GDP rise

It’s a bit late, but I want to comment on it considering it is relatively good news above the surface. For those who didn’t see, the advanced release for GDP in 4th quarter clocked growth at around 5.7%. (here) Considering that this is an advanced release, it will most likely get revised downward later to a more conservative estimate. Why so high? Inventories, mostly, and it is expected that such a growth rate can’t be maintained. ( IHS Global Insight sees growth in 2010 to be around 2.5% – 3.0%)

Beneath the surface there is a nugget of optimism that I want to point out, and that Obama should pay attention to, since timing is critical.  From the BEA release:

Real nonresidential fixed investment increased 2.9 percent in the fourth quarter, in contrast to a decrease of 5.9 percent in the third. Nonresidential structures decreased 15.4 percent, compared with a decrease of 18.4 percent. Equipment and software increased 13.3 percent, compared with an increase of
1.5 percent. Real residential fixed investment increased 5.7 percent, compared with an increase of 18.9 percent.

If you haven’t read previously, I pointed out Greg Mankiw’s belief that an investment tax credit is a great way to spur growth in the economy. I made my case here on Mankiw’s point. Already businesses are seeing that it is profitable in some sectors, notably software, to decide to invest.  As you can see it has spurred tremendous growth for output, which means that demand can only follow.  This in turn will create jobs.  Obama has already indicated an attempt in his State of the Union speech (here) to try and pass a job bill to include an investment tax credit.  Smart move. However, Obama continues to supplant the focus on small businesses when he should be focusing on all sizes.  I am sure not many populists will even notice in order to gain steam against it, because after all, it helps everyone, not just small businesses.   But Obama needs to act quickly if he is going to want to keep growth like this for 2010.  Let’s hope, for something like this at least, that politics don’t get in the way again.