The Financial Economy Has Galloping Pneumonia, Influenza, *and* the Grippe, But the Real Economy Just Has a Cold Opinion

John Berry of Bloomberg is also puzzled at the disjunction:

Bloomberg.com: Opinion: Sure, the U.S. economy has lots of problems, including falling payroll employment, the highest inflation in 17 years, declining home prices and a shaky financial industry. Consumer confidence has dropped into the basement, partly because of the cost of gasoline, which has gotten so high it's killing sport-utility-vehicle sales. Maybe without the tax-rebate checks, consumers wouldn't have been spending on other stuff. Nevertheless they have. The dollar is in the tank, too, adding to inflation, even for goods coming from China.

And for all that, the U.S. economy expanded in the second quarter, and not at too shabby a rate considering the many drags... about a 2.5 percent annual rate in the second quarter.... "The second quarter appears to be actually better than expected," Federal Reserve Chairman Ben S. Bernanke said at a congressional hearing on July 15. "We're looking at the remainder of the year as being probably positive growth but certainly not robust growth."...

At a July 16 hearing, Massachusetts Democratic Representative Barney Frank... said "if the numbers on employment in the second half are no better than those for the first half, we are on track to lose nearly 1 million jobs this year." That's true, though with about 138 million payroll jobs, that would be a loss of three-quarters of 1 percent. Losses in recessions normally are much higher than that.... The unemployment rate... is about a percentage point higher than it was in the first half of 2007, and it is likely to increase unless economic growth becomes stronger than now expected....

Hefty productivity gains are making a difference this time, a contrast with past slowdowns in which productivity normally fell.... Gross domestic product, which had increased at a 4.9 percent rate in the third quarter, all but came to a standstill in the fourth, registering a 0.6 percent gain. The first quarter was a bit better at 1 percent. As demand slowed, businesses quickly cut the number of hours.... In the fourth quarter... [p]roductivity increased at a 1.8 percent pace. The first-quarter numbers... output was up 0.7 percent, hours down 1.8 percent and productivity increased 2.6 percent. Productivity gains in manufacturing... were much stronger than in other industries....

[O]ver the past 12 months manufacturing production fell 0.6 percent.... In the 2001 recession... was caused by a large retrenchment in business investment, there were several months in which factory output fell 0.6 percent or more...

Comments

[Matthew G. Saroff]

Ummmm....2.5% growth...CPI at 5% year over year in june, even with the fishy truly whack seasonal adjustments.

2.5%-5% = -5.5% by my math, but even if you use core CPI (inflation ex-inflation), which is about 2.5%, you get 2.5%-2.5%=0.0%

But much of the GDP increase is increases in spending on food and energy, so we are back to negative territory.

That's what's wrong....Our government is supplying bullsh&% numbers.

[Matthew G. Saroff]

Oops!!!! first equation should be 2.5%-5% = -2.5%

My point though would be that by deliberately underreporting inflation, which has been going on about 25 years now, they are overstating GDP gains, and covering up a recession...And collecting more taxes...and reducing the payout to social security recipients...and so on...

[bigTom]

I think Matt has an important point. The adjustments to inflation were originally justified by the desire to remove highly variable prices, like energy/food from the index. But that could have been accomplished by applying some sort of low pass filter, that would be a lot better than simply throwing out the data that we don't like. I suspect an unstated incentive for the changes, was fear of wage-price inflationary spirals, should the economy again need to adjust to a stepchange in an important external cost (such as of oil). In our current economy labor's pricing power seems too low for that to be a threat.

But, the overestimation of GDP, sure provides some nice cover for the powers that be.

[Altoid]

Someone I know works for an agency that places job ads in newspapers. Business had been more or less okay until pretty recently. Now it's abysmal-- they even had to lay off an accountant/bookkeeper. This happened before the last slowdown, only not as bad. For what it's worth--

[MaryCh]

I'm guilty, guilty, guilty of reasoning by analogy:

Doesn't having a cold make you more susceptible to pneumonia and influenza? It would be irresponsible not to speculate about the Grippe, but so what?

[RedCharlie]

When the financial sector booms, we're told it's a showcase of economic ingenuity. When it crashes, we're told to move along, nothing to see here, it's not the "real" economy anyhow. That's exactly what they said in 1929 and 1930.

To quote Galbraith, "no Chinese wall separates the fiduciary from the real."

And yeah, all the numbers are cooked. Kevin Phillips wrote a very good article on that recently in Harpers.
http://www.harpers.org/archive/2008/05/0082023

[RedCharlie]

When the financial sector booms, we're told it's a showcase of economic ingenuity. When it crashes, we're told to move along, nothing to see here, it's not the "real" economy anyhow. That's exactly what they said in 1929 and 1930.

To quote Galbraith, "no Chinese wall separates the fiduciary from the real."

And yeah, all the numbers are cooked. Kevin Phillips wrote a very good article on that recently in Harpers.
http://www.harpers.org/archive/2008/05/0082023

[piotr]

"Hefty productivity gains are making difference this time..."

except than in manufacturing, with most stellar gains, there was a drop. So what part of the economy is actually lifted by those gain? Repossession -- the vibrant part of financial services?

I will try to follow the links and post conclusions, if any.

[bigmac]

The unemployment numbers are misleading. I suspect many workers are contract workers like myself - we don't show up in statistics.

Here in Florida I've heard that unemployment in construction-related jobs may be as high as 40%.

I'm not unemployed but I'm working less than 15 hours a week.

[Barry]

bigTom: "The adjustments to inflation were originally justified by the desire to remove highly variable prices, like energy/food from the index."

[Not so. The adjustments were and are justified by the desire to remove non-persistent moves in inflation from the index--if an upward jump in inflation is likely to reverse itself in the near future, you don't want to make policy as if it were a permanent shift in the level of inflation...]

The econometric and statistical literature is chock-full of methods to even out such fluctuations (e.g., moving average, weighted moving average). The people dealing with this data and associated analyses have lots of ways of actually dealing with the problem; they don't have to 'deal' with it by deleting it.

It's a deliberate thing, or a 30-year accidental statistical malpractice carried out in the open.

[save_the_rustbelt]

I think we are using 20th century tools to measure a 21st century economy, and something is very, very wrong with the results.

Just saying....

[Michael Turner]

In some sense, food and energy prices aren't really "deletable" anyway. Everything that requires food and energy to produce or provide (which is to say, just about everything money can buy) will reflect any persistent food/energy price increases. (All other things being equal, and with a lag, needless to say.)

As with almost anything in economics, however, there is a caveat. Here's the San Fran Fed's "Ask Dr. Econ" walkback:

"Having said this, measures of inflation that do incorporate food and energy prices are still useful in many circumstances and are closely followed by economists for clues to the behavior of the overall price level. For example, economists may view the sensitive nature of food and energy prices as a symptom of future overall price increases. “A rise in aggregate demand that might set off a period of higher inflation may initially show up in increases in certain sensitive prices that are set in more competitive markets. If these prices are ignored because they are ‘volatile,’ these early signals of inflation may be missed.” (Motley, 1997)."

http://www.frbsf.org/education/activities/drecon/2004/0410.html