Saturday, October 31, 2015

Weekend discussion: the economy

I have been trying to figure out the broader economy for months now, and I have had little success with accurate predictions or a good sense of where things are headed. 

Data points from this week: 
  • 3rd quarter GDP for the US in 2015 was 1.5%, well below the 3.9% seen in the 2nd quarter. 
  • WSJ: there are lots of US companies that are saying their sales are down, including one company's CFO that sells nuts and bolts saying "The industrial environment’s in a recession. I don’t care what anybody says." 
    • While some of that is in defense of their results, I think there's something to it. Most of these concerns are about the (relatively) strong dollar. 
  • The Fed decided not to rate interest rates at its October meeting. 
  • The September employment report was a fair-to-middlin' one at best.  
Prediction time: 
My gut feeling is that the Fed will raise interest rates by a quarter point at its mid-December meeting, but I dunno. 

I think GDP will be below 2.5% in 2016, but I hope to be wrong. 

Readers, your thoughts? 


  1. My WAGs for the next two months:
    - flat GDP and employment
    - no interest hike. Fed feels zero pressure from inflation. Depressing the economy further is not in the interest of major political players.
    - strong dollar is a concern. A bigger concern is that it is such a concern. The economy is sputtering because it is (was) a consumer economy and the consumer is sputtering.
    - GDP picks up as soon as a major natural disaster hits. Low GDP is not that bad. Low consumption is bad.
    - federal budget seems to be set for the next two years. There is a minuscule stimulus and then nothing. There will be lots of noise but no action until the election with the possible exception of the supplemental budget for the US war in Syria.

    OK, that WAG was for longer than two months.

    1. I agree with your predictions except for the natural disaster. Usually it means a hit to the GDP, no matter how much more spending there is, because you're not getting the things that you're usually doing to make money done. A region that produces stuff is paralyzed. That's why during a particular cold winter in the US two years ago, the economy actually contracted and by quite a lot, during that quarter.

    2. Yes, I agree that a natural disaster large enough to incapacitate the means of production will show up as a reduction of GDP. I am not sure we had such huge disasters in the USA after WWII. It is hard to talk about statistics because there are so few of those events in the developed world.

      An example would be the March 2011 Tohoku earthquake and tsunami, and the resulting reactor failures in Fukushima. The disaster knocked out 6-8% of Japan's means of production. There was a short term (Q1 and Q2 2011) reduction in GDP (reduction in production) and a boost in Q3 and Q4 2011 (recovery of production and governmental spending). The overall economic situation got worse because of increase in national debt, but the GDP increased.

      This is a feature of GDP. It increases after sharp small and medium disasters and aligns with economic health only in a very long time frame.

      The winter slowdown was an atypical natural disaster. It was slow to develop, did not involve significant federal relief, and depressed both consumption (a lot) and production (a little). The production (the P in GDP) responded to the reduction in consumption more than to the employees not getting to the work place.

    3. I'm going to expect a manufactured economic crisis for next year. Worked so well for the 2008 election, why not do it again?

    4. This may happen. I just can't figure out which candidate would strongly benefit from a crisis like that.

    5. I guess an "outsider" candidate? Not sure we'll get one of those this time around, though.

  2. My thoughts? I think you'd have better luck reading tea leaves.

    1. The models are correct. It is the fault of the data to have such a wide scatter. :)


  3. Well, I may have to revise my WAGs after today's "strong" job report. The Fed is preparing to do the same.

    Gotta love decisions based on a one-point trend. What was that r^2?


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