Consumer Spending Rises at Fastest Rate in Over Three Years

Well it looks like November retail beat expectations rather handedly. The consensus estimate for November was a .7% increase over October. According to a report from the Associated Press,

Consumers put aside worries about slumping home sales and soaring gasoline prices and headed to the malls in November, pushing spending up by the largest amount in 3 1/2 years. The better-than-expected surge lessened fears of an imminent recession.

The Commerce Department reported Friday that consumer spending shot up 1.1 percent last month, nearly triple the October gain. It was the biggest one-month jump since a 1.2 percent rise in May 2004 and was significantly higher than the 0.7 percent gain analysts had expected.

For the rest of the article, go here.

The Awesome Power of Arnold Schwarzenegger

From the Washington Times:

Last January, $1.42 billion worth of California produce was lost to a devastating five-day freeze. Thousands of agricultural employees were thrown out of work. At the supermarket, citrus prices soared. In the wake of the freeze, California Gov. Arnold Schwarzenegger asked President Bush to issue a disaster declaration for affected counties. A few months earlier, Mr. Schwarzenegger had enthusiastically signed the California Global Warming Solutions Act of 2006, a law designed to cool the climate.

Okay, well mission accomplished Governator. Now can you pass a bill warming us back up? It turns out that 2007 is one of the coldest years on record.

See the rest of the Washington Times article on the record cold in 2007 here.

Also, go here for the U.S. Senate report on how "Over 400 Prominent Scientists Disputed Man-Made Global Warming Claims in 2007."

The Unintended Consequences of Ethanol

President Bush signed a major energy bill Wednesday that calls for production of 15 billion gallons a year of corn-based ethanol fuel and 21 billion gallons of "advanced biofuels" from other raw materials. The unintended consequences of ethanol are explained in the upcoming issue of MIT's Technology Review.

More alarming, the boom in ethanol production is driving up the price of food. Of the record 93 million acres of corn planted in the United States in 2007, about 20 percent went to ethanol. Since most of the rest is used to feed animals, the prices of beef, milk, poultry, and pork are all affected by increases in the cost of corn. The international Organization for Economic Coöperation and Development (OECD) recently warned that the "rapid growth of the biofuels industry" could bring about fundamental shifts in agricultural markets worldwide and could even "cause food shortages."

Add this to the fact that ethanol is highly inefficient and does not provide a net energy gain and you have the makings of a fiasco that can do real economic damage. The forces that drive ethanol are a perfect storm of half baked ideas and misguided good intentions; environmentalism, global warming nonsense, Iowa politics, and energy independence. Ethanol is a mirage that finds appeal across the political spectrum. As far as I am aware, John McCain is the only Presidential candidate taking a stand against government subsidies for ethanol.

See the MIT article here.

U.S. Trade Deficit Continues to Shrink

The U.S. trade deficit is continuing to shrink.  The balance on trade of goods and services and income receipts and payments has decreased from the third quarter of 2006 at $193.5 billion to $152.7 billion in the third quarter of 2007. This over 40 billion dollar narrowing of the trade deficit has been accomplished primarily by an increase in exports which has outpaced the increase in imports. The table below shows the relative growth of the accounts and the narrowing of the deficit.  These figures do not include unilateral transfers of money, such as foreign workers sending money to relatives and family in foreign countries, estimated at $25.8 billion in the third quarter of 2007.

Currently, imports are 24.5% greater than exports. In the 3rd quarter of 2006, imports were 36.3% greater than exports. At the current rates of growth, the United States would eliminate its trade deficit in four years. 

The source of this information is the Bureau of Economic Analysis.

Why Were Not In A Recession

 The single most interesting argument I have seen against the idea that we are in or headed for a recession is the graph below from Mark Perry's blog Carpe Diem. The shaded areas represent a recession. You will notice that the last three recessions correlated with a decline in industrial production but not consumer spending.  According to the latest Fed report, total industrial output grew by .3 percent in November and is up 2.1% from one year ago.  Given the continuing increase in industrial production, it seems rather improbable that we are in a recession.To get Mark Perry's learned commentary on this topic, go here.

Are We In A Recession?

Forget about all the gloomy forecasts for 2008, the New York Times has decided it is time to look deep into our soul and confront the recession within. The Times invited six experts to answer the question, "Are we in a recession?." Here is a sampling of the responses.

Stephen S. Roach, You Can Almost Hear It Pop

The current recession is all about the coming capitulation of the American consumer — whose spending now accounts for a record 72 percent of G.D.P.

Marcelle Chauvet and Kevin Hassett, The Facts Say No

According to the model, the probability that the American economy was in a recession in October, the last month for which we have data, was only 16.5 percent.

Laura Tyson, Bet the House on It

Plummeting real estate values and escalating foreclosures will cause further losses on mortgage-related securities and will further burden American consumers already dealing with higher energy prices and substantial debt.

Jason Furman, Not if Exports Save Us

Net exports added 1.4 percentage points to economic growth over the past six months, more than making up for the 0.7 percentage point subtracted by the decline in residential construction. Exports should continue to grow over the coming year.

James Grant, Nobody Knows

Prices have not come down as they should have. Neither has indebtedness. The architecture of the economy remains as it was. Land, labor and capital are still structured for an imagined glittering future.

Martin Feldstein, Wait Till Next Year

My judgment is that when we look back at December with the data released in 2008 we will conclude that the economy is not in recession now.

See the whole collection of essays here.

Credit Crisis? What Credit Crisis?

WSJ Realtime has an interesting report via Michael Feroli of J.P. Morgan Chase about the Federal Reserve’s fourth quarter survey of terms of business lending. Apparently the Fed found evidence of only very minor tightening of credit.

“The most direct evidence of credit tightening was the increase in commercial and industrial loan spreads over the fed funds rate, which increased to 2.37% points in November from 1.93% points in the previous survey. However, that move only brings the spread back to the level it was in 2005. Moreover, given the decline in fed funds, the actual cost of business borrowing moved down to 6.87% from 7.18% the previous quarter,” Mr. Feroli said.

He added: “A handful of other indicators of bank lending terms reported on in the STBL show little meaningful change, even two months into the current period of credit market stress.”

See the WSJ Realtime post here.

More Inflation Graphs

Below are two more graphs related to inflation.  On top is the one month CPI (not seasonally adjusted).  Below is the twelve month rolling average for the same graph.  As you can see, although inflation is above its ten year average, it is not abnormally high relative to the last eight or nine years.  

Growth Deniers Find New Strategy

Before Thanksgiving, growth deniers told us that consumers were not shopping this year, then when consumers packed the malls, we were told that they weren't actually buying anything but where bargain hunting as a "sport."  If they did buy anything, we were told, it would only be items on sale at a deep discount.  When the sales reports came in well above 2006, the growth deniers explained that this was because of a quirk in the calendar that created an extra week in November. Yesterday, the U.S. Census Bureau released their calendar adjusted figures for November retail showing that sales were up 6.3% over November 2006.  The growth deniers can explain this as well.  It is inflation they say, without inflation and the different reporting calendars there would be no growth.  Is this true? Of course not.

To begin with, the U.S. Census figures were already adjusted for the differences in reporting calendars between '06 and '07, so we don't need to bother with that claim.  The inflation claim is more interesting. What is the inflation rate right now? Including energy and food, the twelve month CPI was at 4.3% in November.  This is the second or third highest in the last ten years and cause for concern.  It is not so high that it waives away 6.3% in sales growth.  The chart below of the 12 month CPI for the last decade gives some historical perspective.Of course, this chart is slightly skewed because it reflects a rise in commodity prices, which are partly inflationary and partly do to increasing global demand.  Also, if we are talking about Holiday shopping, it is not quite relevant, people do not buy kilowatts and bushels of grain for Christmas presents.  The twelve month CPI, excluding energy and food, was 2.3% in November, which is only slightly above the 10 year average and lower than it was for most of last year.  See the graph below.As you can see, this year is not extraordinary compared to the last 10 years in regards to inflation. While some of the increase is do to inflation (this would be true in any year) it does not justify the position that sales this November are either flat or down from last year. Nor does it justify the position that reports of November sales are significantly less meaningful this year than in years past.

Larry Elder on Townhall Today

Larry Elder has an excellent column on Townhall.com today about the credit crisis.  Here are some of the highlights.

George Mason University economist Tyler Cowen says, "We've all heard about the defaults on subprime mortgage loans. But so far, the real story is how little the broader American economy has suffered. Today, banks usually sell their loans to third parties. You might have originally borrowed money from Wells Fargo, but now a bank overseas cashes your mortgage checks.

"If a large group of people can't pay their mortgages, they may lose their homes. But the banks don't suffer as they used to -- local American lenders have already converted those loans into cash and sold off their risk. In fact, German regional banks suffered some of the most significant losses from bad American mortgages. Other European and Asian banks and hedge funds took their lumps as well. American banks essentially bought insurance by exporting their risk overseas."

On falling home prices and mortgage defaults.

U.S. homeowners' equity today equals almost $11 trillion. Price declines for this year and next year may amount to $6 billion, or a 0.05 percent decline -- a worry, but hardly Judgment Day.

Christopher Cagan, of First American Real Estate Solutions, estimates that "the impact of rate sensitivity and subsequent defaults will be well below one-half percent of total mortgage debt outstanding" and spread out over several years.

The column can be found here.

Christmas Retail Cheer Bigger Than Ever in 2007

The U.S. Census Bureau released an advanced estimate of November retail sales and so far they blow past the projected 4% increase from 2006.  Here is the money quote.

U.S. retail and food services sales for November, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $385.8 billion, an increase of 1.2 percent (±0.7%) from the previous month and 6.3 percent (±0.8%) above November 2006. Total sales for the September through November 2007 period were up 5.4 percent (±0.5%) from the same period a year ago. The September to October 2007 percent change was unrevised from +0.2 percent (± 0.2%).

If you have been reading this blog, you may recall I predicted that Christmas sales would exceed the 4% forecast back in early December, see here. At that time, it had been reported that GDP was up 4.9% in the third quarter, productivity was up 6.3%, employment was way up in October and November, wages were up, day after Thanksgiving shopping was up 8.5% over 2006, and ShopperTrak put November sales at 6.5% over the year before period. Those facts, weighted against reports of "negative consumer sentiment," and the rising cost of gas and food, seemed to clearly favor a Christmas season that would exceed previous expectations. Still, many pundits did not want to move off the idea the economy was slowing and that this Christmas would be a bad one in terms of retail sales. Television stations reported that the " the holiday cheer's missing at retail stores." In the face of the positive data, so-called experts such as Peter Morici, an economics professor at the University of Maryland, gave us sound bites such as the following:

The numbers don't tell the whole story, ... Retailers are trying to put a positive spin on things. People are very pessimistic about what things will be like this winter. ... they're buying less expensive items. So it all fits together. It indicates a slowing economy.

As per usual, the doom sayers have not been vindicated.  Get the U.S. Census Bureau report here.

Alan Greenspan in the Wall Street Journal Today

Alan Greenspan has a column in the Wall Street Journal today about the current credit crisis. He discusses a number of fascinating points, including the loss of control of long term interest rates by central banks and when the credit crisis will end. Here are some excerpts.

Arbitragable assets--equities, bonds and real estate, and the financial assets engendered by their intermediation--now swamp the resources of central banks. The market value of global long-term securities is approaching $100 trillion. Carry trade and foreign exchange markets have become huge.

The depth of these markets became readily apparent in March 2004, when Japanese monetary authorities abruptly ceased intervention in support of the U.S. dollar after accumulating more than $150 billion of foreign exchange in the preceding three months. Beyond a few days of gyrations following the halt in purchases, nothing of lasting significance appears to have happened. Even the then seemingly massive Japanese purchases of foreign exchange barely budged the prices of the vast global pool of tradable securities.

In theory, central banks can expand their balance sheets without limit. In practice, they are constrained by the potential inflationary impact of their actions. The ability of central banks and their governments to join with the International Monetary Fund in broad-based currency stabilization is arguably long since gone. More generally, global forces, combined with lower international trade barriers, have diminished the scope of national governments to affect the paths of their economies.

And when the credit crisis will end:

The current credit crisis will come to an end when the overhang of inventories of newly built homes is largely liquidated, and home price deflation comes to an end. That will stabilize the now-uncertain value of the home equity that acts as a buffer for all home mortgages, but most importantly for those held as collateral for residential mortgage-backed securities. Very large losses will, no doubt, be taken as a consequence of the crisis. But after a period of protracted adjustment, the U.S. economy, and the world economy more generally, will be able to get back to business.

The rest of the article can be found here.

United States Economy In Perspective

Over at his blog, Carpe Diem, economist Mark Perry has posted a map of the United States that helps put our 14 trillion dollar economy into perspective.  Each state in the United States is identified as a foreign country with the equivalent GDP of that state.  You will notice, for example, that Florida has an economy the size of Australia's economy.  To view the map, click here.

ADP v. Labor Department

From January to October of this year, the monthly ADP National Employment Report has deviated from the Labor Department report by an average of 54,000 jobs.  The ADP report has tended to understate the number of jobs created.  However, in November, it reported 189,000 jobs compared to the preliminary Labor Department report of 94,000 jobs, a difference of 95,000 jobs.  It will be interesting to see if a Labor Department adjustment moves the November jobs report closer to the ADP number.  In August, ADP reported the creation of 38,000 jobs while the preliminary Labor Department reported the loss of 4,000 jobs. The August report was later revised to show a gain of 93,000 jobs.  In September, the Labor Department report was revised down, from an initial 110,000 to 44,000, an adjustment that brought the report closer to ADP's reported 58,000.  Below is a monthly comparison chart between the ADP report and the Department of Labor report in 2007.

Household Net Worth Continues to Advance

Household net worth has increased for 20 consecutive financial quarters. Total household net worth is now at 58.6 trillion. Up from 38.8 trillion in 2002, a mind boggling 51% increase in less than five years. This increase has continued in spite of the recent subprime problems, absorbing the decline in real estate values and marching on.

Arthur Laffer on Clinton's Economic Policies

Arthur Laffer, the economist who contributed greatly to Ronald Reagen's supply-side economic polices and views, did an interview with Time-Blog recently and had this to say about Bill Clinton's economic policies.

He lost the House, he lost the Senate, he lost the governorships, he lost the state legislatures. And then he became more Reagan than Reagan: He got Nafta through Congress, against the unions, against his own party. He reappointed Reagan's Fed chairman twice. He signed welfare reform, that you actually have to look for a job to get welfare. He cut government spending as a share of GDP by 3.5 percentage points. No president ever has come anywhere near him on that. He had the biggest capital gains tax cut in our nation's history in '97. He got rid of the retirement test on Social Security. This guy was a great president and I voted for him twice.

Although I would decline to say that Clinton was a great president, I think his economic record was highly underrated. It is interesting to see none other than Arthur Laffer giving Clinton so much praise.  It is difficult to know how much of Clinton's financial policy success was due to a Republican congress that was elected specifically to enact smaller budgets, lower taxes, and less welfare.  It leaves some hope that if Hillary gets elected we will see more of Clinton's "more Reagan than Reagen" economic policies.  Here is what Laffer had to say about Hillary's chief rival, Barack Obama,

I love Obama and I think he's a hell of a neat guy and a smart guy. But he'll destroy the economy if he puts in what he says.

Check out the rest of the interview here.

Analysts See Downward Trend In Jobs Data

Some analysts are saying there is a definite downward trend in jobs data. Personally, I don't see any trend at all. Below is a graph of Labor Department figures for monthly job creation since January 2006. What this graph tells me is that the preceding three months is a poor predictor of the following month. Looking back it appears that 4th quarter job creation will be ahead of third quarter performance but second half of 07job creation has been slower than 06 or the first half of 07. So I guess you could make the case for a trend in either direction.

Rumors of Coming Recession are Greatly Exaggerated

Although it seems exceedingly fashionable to predict gloom and doom in regards to the economy, following the ADP report and the drop in jobless claims, a couple of pundits at least are willing to buck the trend and point out that the data isn't trending toward a recession. Larry Kudlow puts it quite well:

So here’s my point: Jobs aren’t folding. Jobs aren’t plummeting. Jobs are strengthening. Now I’m not smart enough to know what the jobs number is going to be tomorrow, but you could easily have a blockbuster 200,000 jobs report. I don’t know, it could be 150K, it could be minus 600K, but I highly doubt that folks. When you see this kind of ADP report, you’ve got a whole new situation.

Meanwhile, Suitably Flip, an excellent blog, has this clear analysis:

The economy is adding jobs fast enough to be pulling people out of unemployment (perhaps much faster than we realize, if ADP is right); the job expansion is the longest in U.S. history and still going strong; the hourly pay for those jobs is increasing (perhaps accelerating), without unduly affecting inflation; and productivity is not only growing, and not only accelerating, but accelerating faster than "analysts said" it would.

Major Retailers Beat November Estimates On Average

Jeff Macke at Minayanville has posted a list of major retailers and how they performed relative to their projected sales. On average, the retailers in the list beat estimates by 1.23%. It should be noted that this average does not accurately reflect the overall retail sales picture because each retailer represents a disproportionate share of the market. For example, Wal-Mart beating estimates by .3% is probably more significant to the overall November sales figures than Chicos missing estimates by 6.8%. Still, when retailers are beating estimates on average it is a strong indication that overall sales figure will be above estimates.

November Grows Extra Week

November retail sales reports are in and it appears that premium stores are doing well with a sharp rises in same store year over year sales; 13.4 percent at Macy’s, 10.2 percent at Kohl’s, 9 percent as Costco, and 8.7 percent at Nordstrom. Improved sales at these stores contradicts the reports that Christmas shoppers this year are only "bargain hunters." What is truly interesting is the justification for these improved sales given by the New York Times.

The sudden improvement can be traced, in part, to a quirk in the calendar, which gave retailers an extra week of post-Thanksgiving sales this November, compared with last, artificially boosting sales.

An extra week in November? If there were some change in the Gregorian calendar that created an extra week in November between Thanksgiving and December 1st, it would surely be a Pulitzer Prize winning revelation. The New York Times, however, is not alone in this version of events.  CNNMoney also reported this apparently amazing fact.

November sales results for many retailers were also helped by an extra week of post-Black Friday sales versus a year ago.

Unfortunately for the Pulitzer Prize hopefuls, November has the same number of days last year as this year. Actually what is happening, and being poorly explained in the media, is that retailers are apparently including an extra week in their reports. This "extra week" is built into sales projections, so it is significant to compare actual sales versus projections. The premium retailers listed above beat projections by the following amounts: 5.9 percent at Macy’s, 4.6 percent at Kohl’s, 2.3 percent as Costco, and 4.8 percent at Nordstrom.

ADP Jobs Report Shocks Prognosticators

ADP, the payroll company, has issued its jobs report which is its estimate for the number of jobs created or lost each month. ADP has inside information on this because they write the paychecks. Using the fluctuations in their clients payrolls as a statistical sample for the rest of the country, ADP puts out a job report that is on average within 30,000 jobs of the Labor Department report. For November, ADP estimates 189,000 private sector jobs were created in November. The latest Reuiters poll of economists showed an average prediction of 75,000 non-farm jobs created in November, according to the Wall Street Journal the average estimate was 50,000 nonfarm jobs. Some economists are revising their estimates upward but few, if any, are willing to admit that ADP is even within 75,000 jobs of what the Labor Department will report on Friday. From WSJ Realtime Economics, here is a round-up of adjustments made after the ADP report.

Paul Ashworth of Capital Economics says the ADP figure suggests a gain of 90,000 nonfarm jobs in the government report, but notes it “has been spectacularly wrong on more than one occasion in its short history.” Ian Shepherdson of High Frequency Economics says the ADP report “is the best single indicator of payrolls month-to-month, but it is still not very good” with a margin of error of about plus or minus 160,000. He raised his estimate for the official number to 125,000 jobs from 50,000. Morgan Stanley economists also raised their estimate for total November employment gains, to 100,000 jobs from an earlier forecast of 50,000.

Once again, I am going to be bullish and "take the over." I project that the ADP report will be within 30,000 jobs of the Labor Department report. Plus there should be about 20,000 government jobs added. So I am projecting 180,000 or more jobs created in November. I also project that if the number comes in that high, economists will complain that a lot of the jobs are temporary for the holiday season. This is sort of the jobs version of claiming Christmas shoppers are just bargain hunters. We can add that to my projection that retail sales in November will show a greater than 4% gain over 2006. The November retail figures are due to come out tomorrow and the labor report on Friday. So for the rest of the week I can look forward to either gloating or eating crow.

3rd Quarter GDP Shows Strong Growth

The revised numbers for the third quarter of 2007 show strong growth in the GDP, 4.9%. Where did it come from? The chart below shows how the economy performed. Notice consumption and exports are the two leading areas of growth. Housing and imports are contracting.

The growth in exports is due in significant part to the "weak" dollar. Looking at these numbers, I question how so many prognosticators can be so sure that Christmas sales will be down and that we are heading into a slowdown.

Money Supply vs. Gross Domestic Product

Ron Paul Presumes to Lecture Bernanke On Monetary Policy

 

Apparently there were too many wrong notions in Ron Paul's lecture for Bernanke to unpack in any reasonable amount of time, so he mostly ignores him.  Rather than be dismissive of Ron Paul, I am going to address some of his economic views on this blog and why they are wrong.  Ron Paul has some interesting views on economic policy that resonant with a lot of voters.  Ron Paul's view that the weak dollar is bad for America is addressed in this post below.

It is the next guy that is in trouble

In his online article The 4 Boneheaded Biases of Stupid Voters, Brian Caplan, a Professor of Economics at George Mason University, describes the pessimistic bias of the public.

As a general rule, the public believes economic conditions are not as good as they really are. It sees a world going from bad to worse; the economy faces a long list of grim challenges, leaving little room for hope. We can call this the pessimistic bias, a tendency to overestimate the severity of economic problems and underestimate the economy’s performance in the recent past, the present, and the future.

At a time when declining consumer sentiment is being reported in the media as if it really mattered, it is good to keep the pessimistic bias in mind. An interesting fact about the pessimistic bias that Brian Caplan does not mention is that people are typically much less pessimistic about their own finances and future, it is generally the next guy and society in general that they believe is in trouble. This is probably due to the fact that they actually know and understand their own financial situation while the only information they have on the rest of society is from the media.

Keep the above in mind and read the below quote from WSJ Real Time Economics.

The nation’s chief executive officers expect a slowdown in U.S. economic growth over the next year, but remain optimistic about their companies’ prospects.

The latest survey by the Business Roundtable, made up of chief executives of major companies, showed that 70% expect higher sales over the next six months. That was slightly higher than when the survey was last conducted in September. In addition, their employment and spending plans edged up. That lifted the overall economic outlook to 79.5 from the 77.4 recorded in September. The survey was conducted Nov. 5-20. A level above 50 indicates economic expansion.

The survey that WSJ Real Time is referring to can be found here. The 160 chief executives who are members of Business Roundtable run companies with a total of 10 million employees and $4.5 trillion in annual revenues, that is roughly 1/3 of the United States GDP.

Mankiw's 10 Principles of Economics Lampooned

Yarum Bauman, who has his Ph.d in economics, spoofs Harvard Professor Greg Mankiw's 10 Principles of Economics.

Economy Top Issue in Presidential Contest

An article today in the Wall Street Journal Online states,

Fifty-two percent of Americans say the economy and health care are most important to them in choosing a president, compared with 34% who cite terrorism and social and moral issues, according to the latest Wall Street Journal/NBC News poll. That is the reverse of the percentages recorded just before the 2004 election. The poll also shows that voters see health care eclipsing the Iraq war for the first time as the issue most urgently requiring a new approach.

Actually, the economy is probably the top issue in every Presidential election. The basic rule is that a sitting President always gets reelected if the economy is perceived to be doing well at the time of the election and loses the election if economy is perceived to be in recession. So far as I know, there has never been an exception to this rule. Notice I said that what matters in a Presidential election is how the economy is perceived to be performing, not how it is actually performing. Given the constant down talking of the economy in the media, one wonders if there is a motive to influence the election or if it is just that bad news gets better ratings.  What ever it is, the tendency of the media to put a negative spin on the economic data seems transparently obvious.  

"Growth Slipped" a Negative Spin on Positive News

The Associated Press and the Reuters News Service reported on the exact same manufacturing report today. The contrast in headlines is amusing. The AP headline portrayed the news as positive with the headline, "New orders boost manufacturing in Nov.", while the Reuters headline had a negative spin. "Manufacturing sector growth slipped in Nov: ISM" What is the best take on the manufacturing data? I think a balanced spin-free summary is given by Norbert Ore, chairman of the ISM Manufacturing Business Survey Committee. He is quoted towards the bottom of the aforementioned Reuters article.

"The news coming out of the financial sector is all gloom and doom but manufacturing is holding its own pretty well,"

"Manufacturing is at a fairly high level. Supply and demand is strong in most sectors. But we're kind of plateauing there,"

"We did see a change in employment and we'll have to see if that's a continuing trend toward lower employment in manufacturing. But given some of the other concerns in the economy, manufacturing is doing well,"

New York Times Column on the "Weak" Dollar

I am always surprised by how many people believe the weak dollar is a negative economic indicator. Maybe they shouldn't call it a "weak" dollar. Maybe they should call it an "export strong" dollar. At any rate, the "weak" dollar is the source of much unnecessary anxiety, typically fueled by the media. Lowering the value of the dollar without inflation is actually considered one of the most significant achievements of the Reagen Administration. On Saturday, the New York Times published an opinion column by Tyler Cowen, a professor of economics at George Mason University, that sets the record straight. Here is an excerpt,

ANXIETY about the dollar continues to spread. The falling greenback is often seen as a sign of an impending recession or the fall of the United States from global leadership. A low dollar simply looks bad. We are, after all, used to judging ourselves against others — comparing our salaries with the earnings of our peers, and our homes with those of our neighbors. We’re used to thinking it is a big advantage to stand at the top of a numerical list.

But when it comes to currencies, a higher value neither brings national success nor predicts future prosperity. The measure of a nation’s wealth is the goods and services it produces, not the relative standing of its currency. Take a look at 1985-88, when the dollar lost more ground than in the last few years. Those were good times, and the next decade was largely prosperous as well....

For the rest of the column, click here. (registration may be required.)

A Quick Economics Quiz

Doom Sayers Launch Preemptive Strike on Christmas

It is a holiday tradition in American media to forecast poor Christmas sales. If it turns out sales aren't as slow as predicted, you can expect reports that shoppers are "only buying bargains" because "money is tight for shoppers this year." 2007 is no exception and is rather notable for the attempts of negative prognosticators to cling to their dire predictions even in the face of positive news.

Even before Thanksgiving, news media such as the Boston Herald reported that, "The list of reasons why this year’s holiday season stands to be a tough one for retailers could be lengthier than most people’s shopping lists." ABC Channel 7 let us know that, "Despite the hoopla of an early start to the season, the holiday cheer's missing at retail stores." UC Berkeley Professor Bob Edelstein informed reporters that a slow holiday shopping season could have far-reaching consequences.

Black Friday finally came and it was grudgingly reported the next day that shoppers had come out in droves. The Washington Post quoted John Ford of Sears Holdings as saying that,"It exceeded our expectations. We had more customers at opening yesterday than we had in prior years, ... it was 50 to 100 percent higher than it was in previous years." Did the increased traffic change the prognostications? "I don't think so," said Candace Corlett a principal with WSL Strategic Retail and apparently professional doom-sayer. According to Corlett, shoppers were out looking but probably not buying. "It's become more of a shopping sport," Corlett said.

Five days after Black Friday, when more data could be collected, ShopperTrak RCT Corp., estimated Black Friday sales this year rose 8.3% from 2006 to $10.3 billion, aka "strong sales." Still, the doom sayers did not give up. Dow Jones warned that, "last year, retailers had a good start during the Thanksgiving weekend, but many stores struggled in December, and a shopping surge just before and after Christmas wasn't enough to make up for lost sales." Before you wonder if the Dow Jones reporter has a good point, keep in mind that Christmas shopping in 2006 was a healthy 4.6% better than the prior year.

We are now officially one week into the Christmas shopping season. According to ShopperTrak, data for the Thanksgiving weekend, not just Black Friday, shows retail sales at a strong 6.5% over 2006. Have the doom sayers relented? Of course not. Instead they have resorted to the "shoppers are only buying bargains this year" argument. "The numbers don't tell the whole story," claims Peter Morici, an economics professor at the University of Maryland, "Retailers are trying to put a positive spin on things. People are very pessimistic about what things will be like this winter. ... they're buying less expensive items. So it all fits together. It indicates a slowing economy."

According to the Dow Jones newswire, the National Retail Federation forecasts a 4% rise in holiday sales from a year ago, the smallest gain in five years. In truth, despite being "the weakest in five years," 4% growth isn't bad. If holiday sales outpace economic growth it means that consumers are either going into debt or they are cannabalizing consumption from other parts of the year. Nobody should be disappointed in 4% annual growth. However, based on the data collected so far, I am going to "take the over" and forecast that holiday sales will exceed the forecast 4% increase over last year.

Predicting Recession

It has been said that economists have successfully predicted 8 of the last 2 recessions. Surely the mainstream media has an even worse record. Financial reporting in the American media is a tedious and unrelenting drizzle about the next recession allegedly lurking just around the corner. These articles are usually supported by a survey showing falling consumer sentiment, a smattering of data on whatever indicators in the economy are not completely bullish, and prognostications from economists who foresee an economic slowdown. Since it is unlikely that the economy will never have a recession, they will eventually be correct. Whether they are genuinely prescient is another matter. Even a broken clock is right twice a day. The interesting thing is that recession is constantly predicted in the face of consistent and pervasive economic growth. An economy is generally considered in recession if the gross domestic product (GDP) is declining. I created the graph below with data from the Economic History Services showing the annual GDP of the United States since 1980.

United States Annual GDP Since 1980

As you can see, recessions have been rare over the last quarter century relative to economic growth, with the gross domestic product of the United States more than doubling over that time period from just over 5 trillion USD to almost 12 trillion per annum. Yet the doom sayers persist unashamed.