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May 30, 2007
Housing Price Expectations: Getting Less Bad...
... at least according to futures for the cities in the Case-Shiller "composite 10" index:
That's still not a pretty picture, but it is the second month in a row that expectations on housing prices have "improved." Could it be that markets are beginning to sense a bottom?
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May 29, 2007
You'll Have To Do Worse Than That
Home prices in the U.S. dropped last quarter for the first time in almost 16 years, as 13 out of 20 cities reported declines in March.
The value of a house dropped 1.4 percent in the first three months of the year from the same period in 2006, according to a report today by S&P/Case-Shiller. Prices last fell during the third quarter of 1991.
The housing slump has yet to shake sentiment. An index of consumer confidence rose to 108 this month from a revised 106.3 in April, a five-month low, the New York-based Conference Board reported today. The private research group's index averaged 105.9 last year.
The decline in prices may not be large enough to concern the majority of home owners, economists said. The drop in prices in the 12 months ended March pales in comparison to the 157 percent gain over the previous 15 years.
Well, sentiment comes and sentiment goes, but just maybe the broader perspective on those Case-Shiller prices really does mean something:
I realize it has become somewhat fashionable to dismiss the fact that these housing-price declines arrive against the backdrop of extraordinarily high levels, presumably on the theory that price appreciation has been more than matched by consumers' insatiable quest to stretch themselves to the limit...
The retreat may deter owners from tapping into home equity for extra cash, economists said. Combined with record gasoline prices, lower home prices raise concern consumer spending, which accounts for more than two-thirds of the economy, will slow.
... or that widespread financial doom (of some sort) is right around the corner. I'll admit that the U.S. economy is not yet proofed from the bullets, but you gotta admit -- so far we're doing a pretty good job of dodging them.
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May 26, 2007
Why Not Just Ask?
I'm home at last from the Conference on Price Measurement for Monetary Policy that has absorbed my attention over the past couple of days, but I have one more post on the topic left in me, not least because the topic of the last several papers -- the measurement of inflation expectations gleaned from survey data -- is one in which I have a particular interest. As far as I know, the review of the ECB Survey Professional Forecasters (SPF) (by authors from the European Central Bank too numerous to mention here) is the first large-scale overview of its kind, and thorough it is. Among the copious information is this, which I found particularly interesting:
... average long-term expected inflation has remained quite stable since the beginning of the survey. On average, it stood at 1.88% with a standard deviation of ±0.04 percentage point. The average long-term inflation expectation was 1.9% at the start of Stage III of EMU in 1999. It declined to 1.8% in 2000 and then shifted upwards to stand at 1.9% again at the end of 2002. Since then, it has remained broadly stable at below, but close to, 2%, confirming the stability of SPF long-term inflation expectations.
The picture, proving the point:
Contrast this with a fascinating observation from the National Bank of Belgium's Luc Aucremanne, Marianne Collin and Thomas Stragier, contrasting actual inflation with perceived inflation based on surveys of consumers:
While there is clearly no doubt about the accuracy of official inflation measures in the euro area during the recent period, there is plenty of anecdotic evidence that since 2002 consumers have tended to perceive that inflation is high, while in reality it was relatively low, albeit slightly above the quantified definition of price stability for the euro area. Apparently a perception gap has grown in the euro area since the euro cash changeover in January 2002.
The pictures are striking:
The kicker is that no such divergence in perceptions occurred in comparable European countries that did not adopt the euro:
I'm not sure what to make of that, other than that there is an awful lot we don't know about what consumers are telling us when they answer these survey questions -- an observation that is confirmed in a review of survey responses from the Czech Republic, Hungary, Poland, and Slovakia by Ryszard Kokoszczynski, Tomasz Lyziak, and Ewa Stanislawska (of the National Bank of Poland).
Until we more clearly understand household responses to the questions we ask, it appears that surveys of professional forecasters represent the best available source for obtaining direct information about inflation expectations. There is growing literature on how to get the most out of these surveys, and I'll close with a word of praise for the paper "What Can Four Decades of Probabilistic Inflation Forecasts Tell Us About Inflation Risks?" by the ECB's Juan Angel Garcia and Andres Manzanares. As the title of the paper makes clear, the idea is to characterize, for example, whether survey respondents see the balance of inflation risks as weighted to the upside or downside. The literature to which the Garcia-Manzanares paper belongs tends to the technical, but it is well worth a look if you have a stake in knowing which way the forecaster winds are blowing.
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Tracked on Jun 20, 2007 3:32:33 AM
Not Quite Live From Dallas -- Inflation Expectations Day
Day 2 of the Cleveland/Dallas Fed Conference on Price Measurement for Monetary Policy, and the topic on the table is measuring inflation expectations. Regular readers of macroblog know that I have particular affection for expectations derived from inflation-indexed Treasury securities, especially those adjusted for liquidity premia reported by the Cleveland Fed. In the Cleveland series the adjustments are, by design, quick and dirty. If, however, you have been hoping for a more sophisticated approach, now you have it for the U.S. courtesy of Stefania D'Amico (and co-authors from the Federal Reserve Board of Governors) and for the euro area thanks to Peter Hohrdahl (Bank of International Settlements) and Oreste Tristani (European Central Bank).
The methodologies of these two papers differ somewhat -- for the aficionados among you, D'Amico et al use a latent factor approach, while Hohrdahl and Tristani employ a more structural strategy -- but the conclusions are essentially the same: For both the U.S. and the euro area, extracting inflation expectations by comparing yields on inflation-indexed securities with those on non-indexed securities requires some sort of adjustment for liquidity or risk premia. The picture that tells the story for the euro area (based on French inflation-indexed bonds specifically):
The thing to focus on in that picture is the solid thin line, which represents expectations estimated without including adjustments for liquidity/risk premia, and the dark solid line, which represents the premia-adjusted expectations calculations. (The dashed lines delimit the statistical confidence intervals about the expectation estimate, and the dotted line represents consensus survey expectations.) The unadjusted series suggests that inflation expectations in the euro area have fluctuated considerably since 1999, and are at historically high levels today. The adjusted series tells quite a different story: Correcting for risk premia -- Hohrdahl and Tristani prefer the designation "risk premia" to "liquidity premia -- generates estimates of expected inflation that have been remarkably stable since the inception of the eurosystem.
The D'Amico et al analysis suggests a similar conclusion for the U.S. though, as with the simpler Cleveland Fed procedure, it appears that liquidity premia have all but vanished in the last several years:
The balance of the day moved from the extraction of expectations from market asset prices to discussions of expectations derived directly from surveys. More on that to come.
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May 24, 2007
Almost Live From Dallas
Today and tomorrow finds me in the fine state of Texas, at a conference on "Price Measurement for Monetary Policy," co-sponsored by the Federal Reserve Banks of Cleveland and Dallas. First up was a paper by Diana Weymark and Mototsugau Shintani from Vanderbilt University, titled "Measuring Inflation Pressure and Monetary Policy Response: A General Approach Applied to US Data 1966-2001." The idea is take a particular model of the economy and monetary policy, and ask the following sort of questions: How responsible was the central bank in determining inflationary outcomes, where the central banks influence covers both active policy (or interest rate) choices, as well as the evolution of inflationary expectations.
The experiment is a tricky one, and several people commented on whether the precise nature of the measures used to answer this question exactly captured what the authors had hoped. But the results are certainly provocative:
One of the most striking aspects of [our results] is the similarity of the Fed’s policy response over the 35 year period under study. The [policy stabilization] index measures the proportion of inflationary (or deflationary) pressure removed by monetary policy. The average [index] values show that under all five chairmen, the Fed countered positive inflationary pressures and magnified deflationary pressures...
Volcker and Greenspan are now generally credited with having taken a tough stand against inflation. However, our... indices show that monetary policy under Martin and Burns was also effective in counteracting inflation pressure... monetary policy under Miller was much less effective in combating inflation than under the previous two Chairmen. However, according to [our results], inflation pressure during Miller’s tenure as Fed Chairman was 3 times higher than it had been during the previous eight years... that Miller did try to use periods of deflationary pressure to bring about significant reductions in inflation. However, these efforts were not very successful because... the deflationary episodes were considerably weaker than the inflationary pressures that developed during this period...
... the Fed’s lack of success under Miller may in part be attributable to an inability to convince economic agents of the Fed’s commitment to price stability.
I'm not sure that result would be robust to other approaches to measuring Fed effectiveness -- and certainly the management of inflation expectations can be mainly placed upon the doorstep of the central bank -- but, heck, might as well let the rehabilitation of G. William Miller's reputation get its due.
UPDATE, Paper 2: Wherein Lafyette College's Julie Smith asks the question "Better Measures of Core Inflation?" "Better" here means a more accurate forecast of CPI inflation one or two years out than you can get with the median or trimmed-mean CPI. The answer the author gives is "yes", and the key (for you stat geeks) is to (a) individually estimate models for the individual component prices of the CPI market basket, but (b) estimate your statistical models for the components jointly. If you are interested in such forecasting issues, the paper is worth a look.
Paper 2, Update 2: Asked from the floor: If what we are interested in is a good forecast of future inflation, why not use a full forecast model, based on all kinds of data, rather than a core inflation measure? And if forecasting is not what we are nterested in, what's the point of core inflation in the first place? Good question that.
Update, Paper 3: One answer to that last question is provided in the paper "Policy-Sensible Benchmark Core-Inflation Measures for the Euro Area and the U.S.", by Stefano Siviero and Giovanni Veronese from the Bank of Italy. The essence of the argument is that we are not primarily interested in doing forecasting well, but in doing policy well. A central bank should focus on core inflation if doing so helps them better achieve its ojectives (typically taken to be some combination of low headline inflation, maintaining GDP growth near its potential, and relatively smooth interest rates). Although the results are tentative, Siviero and Veronese shout out a warning to fans of the usual core inflation suspects:
Our findings suggest one cannot recommend that the most popular core inflation measures be used to support monetary policy-making. Specifically, we find that it is arguably inappropriate to remove all erratic components from headline inflation: by reacting to core inflation measures that do so, monetary policy effectiveness may be seriously impaired, even if one's reaction is designed in such a way so as to be optimal on the basis of standard welfare criterion.
The message here is one that ought to be communicated more clearly by monetary policymakers: It can be quite appropriate for a central bank to focus on some measure of core inflation, not because it is something the central bank thinks you should care about but because it helps to control the thing you do care about -- in this case, overall or "headline" inflation.
UPDATE, Paper 4: Next up -- Core Inflation as Idiosyncratic Persistence: A Wavelet Approach to Measuring Core Inflation , by Richard Anderson,* Federal Reserve Bank of St. Louis; Fredrik Andersson, Lund University; Jane Binner, Aston University; Thomas Elger, Lund University. Here we find another shot at motivating core inflation as something a central bank uses to better control overall inflation, and control it in a way that generates the best outcomes for its customers -- i.e., you and me. The actual game in this paper is, nonetheless, straighforwardly statistical. The idea is essentially the following familiar idea: Every individual price in the economy is a combination of an underlying trend and temporary ups and downs, and the statistical problem is to separate the two.
The application of the idea, however, is not so simple, or familiar. Unless you are conversant in things like wavelets, neo-Edgeworthian index numbers, and stuff like that -- or are interested in finding out about them -- you are likely to find the paper a bit of a slog. However, the authors do offer up what is becoming a theme at this conference: Whatever a core inflation measure ought to be, something like the CPI ex food and energy is not likely to be it.
Update, Paper 5: Looking for horse race? Rob Rich and Charlie Steindel are your boys. Here's what they do, in "A Comparison of Measures of Core Inflation"...
This paper examines several proposed measures of U.S. core inflation: an ex food and energy series, an ex energy series, a weighted median series, and an exponentially smoothed series. We evaluate the performance of the candidate series using criteria such as ease of design, accuracy in tracking trend inflation, as well as explanatory content for within-sample and out-of-sample movements in aggregate inflation. The empirical analysis principally focuses on the methodologically consistent Consumer Price Index (CPI) which is only available starting in 1978. As a check for robustness, we also provide a summary for Personal Consumption Expenditure (PCE) inflation starting in 1959.
... and here is what they find:
... we find no compelling evidence to focus on a particular measure of core inflation, including the series that excludes food and energy prices. We view the results as consistent with the diversity of findings reported in previous studies, and suggest they are a consequence of the design of the individual core inflation measures and their inability to account for the variability in the nature and sources of transitory price movements.
In other words, if what core is all about is disentangling longer-run trends in price movements from temporary ups and downs -- the idea of the Anderson et al paper in the previous update -- none of the stanard simple measures of core are uniquely (or consistently) qualified for the task.
UPDATE, papers 6 and 7:
The Rich and Steindel paper in the previous update did not include trimmed-mean measures of core as part of the analysis. If your core-inflation jones is aching as a consequence, Andrea Brischetto and Tony Richards (Reserve Bank of Australia) and Mike Bryan (Federal Reserve Bank of Cleveland) will ease your pain in "The Performance of Trimmed Mean Measures of Underlying Inflation" and "Monitoring Inflation in a Low Inflation Environment," respectively. (In case you have forgotten, an x-% trim just means lopping of the x-% most extreme prices within a distribution of prices, whatever they may be.) Brischetto and Richards look at various trims (corresponding to different percentages of the price-distribution which are excluded) for the Australia, the Euro area, Japan, and the U.S. They find:
Based on data for four economies, we find that trimmed means tend to outperform headline and exclusion-based core measures on a range of different criteria, which indicate that trimmed mean measures can be thought of as having a higher signal-to-noise ratio than either of the other measures. This makes trimmed means more useful for extracting information about the current trend in underlying inflation from the relatively noisy monthly or quarterly CPI data.
This does not seem entirely consistent with the Rich and Steindel analysis, but Mike Bryan stressed that, first, trimmed-mean estimators represent a technique for reomoving high frequency -- that is, very short-term -- noise in the inflation process. Looking for improved forecast performance over a longer horizon is not likely to be productive.
Second, Mike stressed that it is precisely in low inflation environments that trimmed-mean core measures really shine. Here's what I found really interesting: If you apply statistical tests to find when the inflation trend changed in the United States, you will find there was a change September 1981 -- when the average inflation rate fell from 9.4 percent per year to 4.1% per year -- and January 1991 -- when the trend fell from 4.1 percent to 2.7 percent. Now consider ask the question"if you were watching a measure in core inflation in real time, when would you have picked up theses changes in trend?" It turns out, the choice of core or headline, this core or that core, wouldn't have mattered much when the change was big, as in 1981:
When the change was small, however -- as in 1991 -- you could pick the shift up fairly quickly with core measures -- trimmed measures in particular -- and not for nearly six years with the headline number:
Steve Cechetti (Brandeis University) reacted to all of this, and closed things with this observation: A core inflation measure should be smooth, track the trend in inflation, and give you information about breaks in trend relatively quickly. Core inflation measures should not be the target for monetary policy, or (necessarily) be the best possible forecast for inflation.
An interesting end to an interesting day.
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Tracked on May 24, 2007 8:09:49 PM
May 22, 2007
Too Much Ado About The Yuan Peg?
Over at Angry Bear, pgl provides a rundown on a bit of a blogworld dust up over the consequences of Chinese exchange rate policy. The first fighting words were issued by Dartmouth's Matthew Slaughter. From the Wall Street Journal Online:
... the dollar-yuan peg are misplaced. Economic theory and data are very clear here on two critical points. Controlling a nominal exchange rate is a form of sovereign monetary policy. And monetary policy, in turn, has no long-run effect on real economic outcomes such as output and trade flows.
Gotta say that makes an awful lot of sense to me, but Brad DeLong nonetheless takes exception:
... Matthew Slaughter's assertions are based on his assumption that full long-run monetary and price-level adjustment has already taken place, yet the pace and magnitude of China's reserve accumulation (and Japan's) are very strong signs that the PBoC and the BoJ are blocking monetary and price-level adjustment--and that is the problem.
Brad and pgl both cite the cogent analysis of knzn:
What the People’s Bank of China is doing is... attempting to cool the economy by raising interest rates.... It is trying to keep exports strong by keeping the currency weak, and at the same time, it is trying to reduce domestic demand by tightening domestic monetary policy. As a result, it is accumulating a huge, huge, huge quantity of dollar-denominated assets, and this rate of accumulation is clear evidence of a policy conflict.
The conflict might be a bit more obvious if things were going in the other direction. If China were trying to peg the yuan too high rather than too low, while at the same time trying to stimulate, rather than cool, its domestic economy, it would be losing reserves rapidly. The process couldn’t continue, because it would run out of reserves. Then it would be forced either to abandon the peg or to tighten the domestic money supply dramatically. Because the process is now going in the opposite direction, there is no “crisis”, but otherwise what we are seeing is the exact inverse of conditions that would normally have led to a foreign exchange crisis.
Good stuff, from both Brad and knzn. But I'm somewhat puzzled why they are so exercised by Slaughter's comments. Says Brad:
To state that if we assume that the problem doesn't exist then we conclude we don't have a problem is just not very helpful. And not one in a hundred readers of the WSJ op-ed page will be able to diagnose just how Slaughter's piece is a misleading tautology.
Of course, when a country does have a foreign exchange crisis, we don’t read economists saying that it is just “sovereign monetary policy” and nothing to worry about. When the process happens in reverse, though, apparently central banks can find plenty of apologists for their unsavory policies.
I'm failing to see as much conflict as all the spilled typing suggests. I would not myself characterize an exchange regime, fixed or otherwise, with a word like unsavory -- or distasteful, yucky, stinky, or with any other such value-laden language. knzn makes the point that is worth making which is, if markets are allowed to work, unsustainable pegs won't be sustained. In the case of an overvalued currency, the whole scheme ultimately collapses for want of foreign currencies with which to intervene. In the case of an undervalued currency, monetary creation results in the inflation that depreciates the value of the currency, which solves the under-valuation problem. I think Matthew Slaughter agrees.
Furthermore, I certainly agree that there may be lots of ups and downs along the road to long-run neutrality of monetary policy, as Professor DeLong indicates. But I don't see anything suggesting that Professor Slaughter has it wrong in the larger scheme of things. Writes the former:
This policy conflict could end in one of several ways:
- A sudden large burst of inflation in China, as the PBoC finds that it can no longer maintain both the current exchange-rate peg and a stable effective money stock, and sacrifices the second to the first.
- A sudden large rise in the value of the yuan, as the PBoC finds that it can no longer maintain both the current exchange-rate peg and a stable effective money stock, and sacrifices the first to the second.
- Slow and gradual versions of (1) and (2) as holders of nominal yuan assets in the first case and nominal dollar assets in the second let their wealth be gradually but substantially be eroded without ever taking steps to cut their losses.
- Something more unpleasant.
Items 1-3 on that list sound to me an awful lot like the nominal adjustments emphasized in the Wall Street Journal piece. What's more, I don't think Matthew Slaughter is quite as sanguine as suggested by either knzn or Brad DeLong:
Put it this way: In a counter-factual world where over the past decade China allowed the yuan to float against the dollar, the U.S. would still have run a large and growing trade deficit with China. The real economic forces of comparative advantage that drive trade flows operate regardless of which nominal prices central banks choose to fix.
This week the U.S. government hosts Chinese officials for the second round of the Strategic Economic Dialogue. Treasury Secretary Henry Paulson and Chinese Vice Premier Wu Yi have framed the SED as a forum to address complex policy issues associated with the links between our two countries. In China, further capital-market reform is needed to support economic growth via better risk management and capital allocation throughout all sectors of the economy. Here at home, the large aggregate gains the U.S. has realized from freer trade and investment with China have also generated hardship, too. Many American workers, firms and communities have been hurt, not helped, by Chinese competition.
Issues like these are legitimate and real. But focusing on the dollar-yuan peg is a misplaced and counterproductive way to address them. Instead, let China continue to conduct its sovereign monetary policy and let the SED continue to engage the real challenges. Stop fixating on the fix.
I may be completely misinterpreting things, but it seems to me that the point is simply that the peg alone cannot be the biggest issue in the discussion. I guess the disagreement here may be that the Slaughter piece puts more emphasis on the strains that trade-related adjustments in resource allocation inevitably bring, while pgl (and DeLong and knzn, I guess) are more concerned about distortions in resource allocation associated with questionable trade restrictions, capital controls, bad economic policy in the U.S., and so on. Fair enough. But none of that is about the yuan peg per se, and I think Matthew Slaughter was right to say so.
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May 21, 2007
Why Do We Have Money?
UPDATE: The broken link is fixed.
Think about a dollar bill.
If you’re hungry, you can’t eat it; in a rainstorm, it won’t keep you dry. But you can trade it for an apple or an umbrella. If you lived in a world without money, how would you get the things you want and need?
Play Escape from the Barter Islands to find out!
If you are a young student, a teacher presenting economic concepts to young students, or simply someone who feels like a young student, give it a shot.
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May 18, 2007
China Having Problems With The Peg?
China’s central bank on Friday widened its daily trading band against the dollar for the renminbi to 0.5 per cent from 0.3 per cent, while raising interest rates and banks’ reserve requirements.
The widening of the trading band is sure to fuel expectations that China will allow the renminbi to rise at a faster rate as its politically sensitive trade surplus soars.
You were expecting the "however", weren't you?
However, People’s Bank of China insisted the move was just a further step in its gradual reform of its currency exchange regime and that it should not be seen as prelude to a revaluation.
"(The widening) is a constructive institutional step, and certainly does not signify that there will be great volatility in the renminbi exchange rate, even less does it signify that there will be a large appreciation,” the central bank said.
The track record suggests you should believe what they say, and some are of the opinion that this is a lot of not much. From the Wall Street Journal:
The band widening is a "symbolic but laudable" move that will help shift China's economy toward more domestic-led growth, said analysts at Goldman Sachs.
It "means nothing" for yuan appreciation, said a Shanghai-based trader with foreign bank. "We don't even use half of the current band. This is just to impress [U.S. Treasury Secretary] Henry Paulson."
Nonetheless, a report on the policy move from China Daily has a more urgent tone than usual:
... the tightening policies have largely failed to prevent the economy from becoming overheated. The gross domestic product grew 11.1 percent in the first quarter of the year, compared to last year at 10.7 percent, statistics showed.
Total value of the Chinese stocks hit 17.43 trillion yuan (US$2.27 trillion) yesterday and has likely surpassed the total in household deposits, as money continues to flow out of banks and into the stock market.
In April, total household renminbi deposits dropped to 17.37 trillion, a decrease of 167.4 billion yuan (US$21.7 billion) compared with March. Household deposits may drop further in May as investors are rushing to withdraw money from savings accounts and pump them into the stock market, the Shanghai Securities News reported.
It should be noted that, if the claim that the yuan remains undervalued is correct, demand pressures on the economy are inevitable. From macroblog past:
... abstracting from capital controls, theory would predict an undervalued currency is a problem that should eventually take care of itself. The reason is that pegging the nominal exchange rate -- the only currency price a central bank can hope to influence in the long run -- requires flooding the world with your domestic currency. Given enough time, the inflationary consequences of those policies will cause the fundamental value of the nominal exchange rate to fall on its own.
"Abstracting from capital controls" is not, of course, a phrase that ought to be used in discussions of Chinese financial markets. But the effects of mispricing have to show up somewhere, and it does appear that the yuan peg may have become a bit of a struggle.
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May 17, 2007
Soft, Not Too Soft
This morning's email from the Goldman Sachs Global Markets Research Group contains this assessment:
The recent industrial news, including April US industrial figures yesterday, have been positive, especially as it reduces the probability of one of the tail risks in the market, i.e. too soft growth. Nevertheless, we think the market remains too optimistic about US growth trends going forward. This is highlighted in the current Blue Chip Consensus, which shows US GDP growth rebounding from 1.3% in Q1 (which as the US Daily discusses overnight is likely to be revised down) to 3% as soon as second half of this year.
If our US growth views prove correct, the market may yet need to revise down its growth expectations. In that regard, it is striking how growth expectations in the equity markets (as captured by our Wavefront US growth basket) have continued to grind higher.
So, while we are comfortable with our view of a US soft landing, markets may need to adjust to a less optimistic macro reality than is priced in. This potential downward adjustment could prove to be one of the several road bumps for risky assets in coming quarters.
Not everyone will have to revise down those expectations. The economists queried for last week's Wall Street Journal forecasting survey seem to (at least broadly) share the Goldman view:
On the whole, the 60 economists predict gross domestic product, the broadest measure of economic output, will grow at a 2.2% annual rate this quarter. Over the second half, they expect growth of about 2.6%, which is a slight reduction from what they had forecast in a survey conducted last month. They don't expect growth to reach 3% until the second quarter of 2008.
Certainly the voices of Fed chairs past and present, while not endorsing a particular forecast, are aligned with the no-tailspin crowd. From Bloomberg:
The Fed chairman maintained his forecast that the slump in housing won't have a broader impact on the economy. "We do not expect significant spillovers from the subprime market to the rest of the economy or financial system,'' Bernanke said.
Fed officials this year have cited the housing recession as a main risk to growth, which was the weakest in four years last quarter. Bernanke's comments today reflect the consensus of policy makers that the downturn in housing is unlikely to cause consumers to cut spending. Former Fed chief Alan Greenspan also said that subprime problems aren't spreading to lower-risk loans.
"The prime market is doing reasonably well,'' Greenspan, who retired in January 2006, said today at a meeting hosted by the Atlanta Journal-Constitution in Atlanta. "Some people are holding off on purchasing homes. Even so, we are getting a gradual rise in the prime market.''
Meanwhile, the rest of the world seems to be doing pretty well, thank you. Back to the Goldman boys:
We do not expect the prolonged period of sub-trend US growth that we foresee to cause major problems for the rest of the world. Recent data has shown further evidence of global decoupling with softer US economic news on the one hand (soft retail sales), and robust growth dynamics in the rest of the world, particularly in Europe and China (Q1 GDP growth in Euroland was above consensus and the April activity data for China have been strong).
However, this begs the question of how bad it would have to get for the global decoupling theme to unravel?
In our latest Global Economics Weekly, we extended the spill-over analysis we conducted last year to study the growth experience of other major economies (Japan, Germany, UK and France) conditional on whether US economy is contracting (i.e. real growth on qoq terms is negative) or expanding (i.e. real growth on qoq terms is positive)...
... Overall, our analysis supports our thinking that as long as US growth remains in expansion mode (which we forecast), other major economies should be able to decouple.
According to a report in todays the Wall Street Journal, some rather astute folks think it may be the other way around:
Early last year, [chief investment officer at Pacific Investment Management Company William H.] Gross's outlook for the U.S. bond market hinged on housing. "We did our homework," he says. "We sent out scouts into middle America, down to Florida." They did make some correct calls, such as predicting a drop in long-term interest rates last summer.
What Pimco didn't foresee was the impact on the U.S. of the strength in the global economy, led by China and the rest of the Asia. Mr. Gross says they recognized there was inherent strength abroad. But they counted on issues such as the U.S. trade deficit and increasing leverage around the world to have "snapback potential like a rubber band" that would restrain growth and allow the Fed to lower rates. That didn't happen.
Either way, the soft-landers appear to be feeling their oats.
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May 16, 2007
The Wisdom Of Forecasting Crowds (Such As It Is)
Ever wonder who you should turn to for expert economic prognostications? My colleagues Mike Bryan and Linsey Molloy (future Chicago MBA!) remind us that the answer is everybody and nobody:
... we examine economists' year-ahead growth and inflation predictions since 1983 to see whether any have distinguished themselves as particularly good (or bad) forecasters over time.
We find little evidence that any forecaster consistently predicts better than the consensus (median) forecast and, further, we find that forecasters who gave better-than-average predictions in one year were unable to sustain their superior forecasting performance—at least no more than random chance would suggest.
Not that consensus forecasts are all that great:
... we summarize the track record of the median economist’s year-ahead predictions for real GDP growth and CPI inflation since 1983. (Forecasts were compiled by the Livingston Survey.) If we arbitrarily define an accurate prediction as being within 1/2 percentage point of the realized outcome, we would say that since 1983 the median forecast was accurate in only seven years, or about 30 percent of the time... The accuracy of the median forecaster’s prediction of inflation was a bit better over the 23-year period. Inflation predictions were accurate—that is, within 1/2 percentage point of actual inflation—39 percent of the time...
... So suppose the median forecaster expects the economy to grow 3.4 percent next year (its average since 1983). You could conclude—with 90 percent confidence—that the economy will grow between a robust 5.8 percent and a sluggish 1 percent. Similarly, the RMSE of the median economist’s inflation prediction over this period was 1 percent, which means that given an average inflation rate of 3.1 percent, you could be about 90 percent confident that prices will rise between a stable 1.4 percent and an uncomfortably rapid 4.8 percent over the coming year.
Fair warning, I think.
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» Forecast Accuracy and Consensus Forecasts from Businomics Blog
A recent report from the Cleveland Fed by Michael F. Bryan and Lindsey Molloy confirm older results that consensus forecasts do better than any one forecaster. (Hat tip to Macroblog.) That's one reason I pay close attention to consensus forecasts, [Read More]
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