The August WSJ forecasts are out, and it is another mixed bag, though mostly negative. On the positive side, third and fourth quarter GDP forecasts went up by a tenth of a percent. Forecasts for unemployment through 2019 all went down and payrolls employment increased slightly.
However, annual growth for both 2017 and 2018 ticked down slightly. In addition, all the consensus federal funds rate forecasts decreased, indicating lower expectations for the future job markets. This coincides with lower expectations for inflation through 2019.
These changes in forecasts reflect the recent low inflation numbers, despite the upbeat employment report. St. Louis Fed President Jim Bullard recently commented on inflation and current monetary policy, which provides a window into the subdued outlook by the WSJ forecasters. In Bullard's view, low commodity (mostly oil) prices have been having the greatest impact on headline inflation, which, he believes, will outweigh any impact of any future improvements in the job market.
If we take that insight as given, the WSJ forecasters are predicting increase in oil prices (and housing prices) over the coming years. Should those increases materialize, the Fed might final realize their two percent target inflation rate.
Economists model the economy, which really means we model thinking and decision making. A post from a few weeks ago showed that professional forecasters display less future federal funds rate uncertainty. Could this reflect a more general trend of individuals having more information about the federal reserve system? The most visible member of the Federal Reserve is the Chair, and google trends provides excellent data on the relative frequency of Fed Chair searches:
As each chair transitions we see the appropriate shifting of search traffic from one person to the other. The notable difference the relatively low number of searches of current chairwoman Janet Yellen. It appears this is an artifact of declining interest in the Federal Reserve searches in general:
Re-weighting the first graph by the second we see that relative to Federal Reserve searches, Janet Yellen has been searched for at least as much previous Fed Chairs:
While it is nice to know that there does not appear to be a gender bias, a puzzle remains. Why has fed funds rate forecast uncertainty decreased while interest in the federal reserve has waned? Perhaps searches have declined because the Federal Reserve has done a better job at communicating future policy, which eliminates the need for gathering additional information.
Today marks the three month anniversary of this website and blog. I will be taking a brief hiatus from blogging over the next week.
Thank you all for reading these posts. I hope that you have enjoyed reading as much as I have enjoyed sharing my love of facts, figures and forecasts.
Enjoy this list of my favorite posts from the first three months:
The recent release of second quarter GDP growth came in below WSJ expectations as well as a downward revision of first quarter growth (from 1.4 to 1.2). This new data follows weak inflation numbers from last week.
1. For the past two years expectations exhibit an upward bias. Which, if that bias holds true, means low future expected growth would indicate even lower actual growth. Projected growth in 2018 is 2.38 percent, and 1.94 percent in 2019. These are significantly below the administrations overly optimistic 3 percent promise.
2. Expected federal funds rates have been falling since the beginning of the year. Not by a lot, but it has been consistent, suggesting that new data will give the Fed pause in increasing their target rates.
3. Expected housing starts continue to fall. At the beginning of 2016 expected housing starts were quite robust, however, subsequent data have curtailed consensus optimism. If this expectation falls below 1200, that could be a signal the beginnings of a slow down in the housing market.
While there some signs of growth remain, these three sets of expectations should worry investors and the current administration. All indicate at the very least, that the economy will not grow particularly quickly in the coming year. In the worst case scenario we may see the beginnings of a recession by the end of 2018.
A common way to consider technological innovation and growth comes from patents. Today's post uses an unobserved components analysis to examine the level, trend, and cycle of US utility patents since the early 1800's. Early patent growth seems quite normal growing slowly with a few eras of slightly more inventions (WWII for example):
However, the pattern appears remarkable different from the 1990's on. The exponential growth can be traced to the beginnings of the computer age and in fact the decline in the early 2000's was a direct response to the "dot com" bubble. In addition the volatility of both the trend and the cycle appears increase over the past 2 decades.
Are we really adding that much technology to our lives? Economists typically think of technology and innovations as driving increases in standards of living. If so we should expect sharp increases in standards of living in the coming years. However, many patents created today cover mundane and/or incremental improvement to an existing technology or tool. For example, consider the light bulb, refrigeration and internal combustion engines. All had huge implications for the way we lived our lives and created dramatic improvements. Does a patent on how an app icon bounces or the precise way a phone's edge is beveled come anywhere close to that standard?
That's not to say that with the dramatic increase in patents we are not going to discover some grand invention that changes the world as we know it (can I get a Star Trek transporter please?). However, it does seem that patents are losing their usefulness as a measure of technological progress. In the mean time we can keep hoping. Energize!
The BLS recently released the new CPI and inflation statistics. This signals a weakening economy along the lines of Tim Duy's analysis. As Mark Thoma points out, the Fed does not have a lot room to defend the economy against a recession, and congress seems incapable of doing anything at the moment. The WSJ Economic Forecasters expectations indicate further trouble, since they are above actual inflation, but are dropping:
If lower inflation expectations exist in the rest of the economy we can expect slower growth in the coming months. Lower inflation expectations usually are a self fulfilling prophecy, since workers, firms, and households make decisions that reinforce the low inflation future. For example, firms might anticipate lower revenues and therefore lower prices in order to drive up sales.
How do these lower inflation expectations fit into the larger long term picture? Well, the same analysts forecast GDP growth at 2.38 and 1.94 in the 2018 and 2019, respectively. In addition, my previous post on Fed funds rate expectations uncertainty indicates that Federal Reserve credibility (at least in terms of future interest rates) has improved. Inflation expectations for 2017 are low, but expectations for 2018 and 2019 are both firmly above 2 percent. This suggests that analysts believe the economy will slow down in the next two years and that the Fed will take appropriate measures (with what little room they will have) to fend off or minimize a recession.
Endogeneity, or the chicken and the egg problem. Previously addressed in a post on Housing Prices in the US, this time we exam alcohol. Do we drink more during and after and recession because we are depressed? Or does the fall in income curtail our ability to purchase alcohol? Coming into this analysis, it seemed likely that the former was true, turns out, the latter seems to be true during the great recession.
The state level data collected comes from the Tax Policy Center and GeoFred. Surprisingly alcohol tax revenue per person has been increasing by about 2 percent per year, more or less keeping up with inflation. The graphs below show relative changes in Alcohol Tax Revenue per Person and per Worker in all 50 states (and DC), with a base year of 2009. While there are certainly a few states that saw large increase post recession, it is unclear whether we are observing increasing or decreasing growth rates.
To address that question we can calculate average growth for each state in the five years prior to 2009 and and the five years after. Calculating the difference of the average we find that growth of alcohol tax revenue per person declined by 0.35 percentage points while per worker it declined by 1.59 percentage points. If instead we choose 2007 as the mid point, so that the 18 months of the recession are part of the post period, the numbers for per person and per worker are a 1.46 percentage point decline and a 0.11 percentage point increase, respectively. Those results suggest that it's likely that the income effect dominates the "feeling depressed" effect.
Naturally with a rough analysis like this there are some caveats. Tax revenue is not the same as consumption, but I suspect they are highly correlated, particularly when the tax laws have not changed. To really be sure of this result one would need to control for increases (and decreases) in alcohol sales tax rates. In addition, the recession hit states disproportionately. A more proper analysis would take that into account. Finally, this analysis also lacks a way to control for substitution effects, that is, a switch from expensive to cheap alcohol.
The WSJ economic forecasting survey published mostly good news. Surprisingly, the positive jobs report did little to change forecasts of payroll employment, however it has lowered expectations of a federal funds rate hike by December:
Most of the consensus revisions saw improvements over the next six months to a year, most notably with the probability of a recession dropping by almost one percentage point to 14.77 percent. The consensus also revised oil prices in December down by almost 3.5 dollars to 47.44. Though predicted GDP growth for the year increased slightly, predictions for Q2 fell by 0.2 percentage points to 2.72 percent. The table below summarizes the changes in forecasts for some key variables.
Inflation revisions seem correlated with significant drops in crude oil prices, however the unemployment revisions seem at odds with the federal funds rate revisions. If unemployment is expected to be better, forecasters should be predicting increasing federal funds rates. Perhaps they believe that their lower inflation forecasts imply a more accommodating stance from the Fed.
Following up on Monday's post about the employment report, today's post will look at the most recent employment data using Hamilton's filtering method. The commenters on the Federal Reserve (see Tim Duy or Narayana Kocherlakota) have noted the uncertainty surrounding employment and inflation. Kocherlakota specifically sees weakness in employment and downplays inflation worries. Tim Duy is less prescriptive, but also notes the uncertainty. The graphs below demonstrate where this uncertainty is coming from.
Employment and weekly hours appear to be at their trend, or falling slightly below (not good), but initial jobless claims and unemployment are well below their trend (good). The most telling sign is the continued drop off in weekly hours, which could mean that employers have worked through the "slack" in the economy. The graph of real wages below corroborates that story:
From 2013-2015 real wages finally started to rise as weekly hours fell and the job market tightened. However, recent wage reports have indicated a return to stagnant real wages (meaning wages are only just keeping up with inflation). Real wages climb when employees have bargaining power, which happens when fewer qualified people apply for the same jobs. Despite a healthy June jobs report, the likelihood of sustained jobs growth seems to be dimming with each month.
Bill McBride at Calculated Risk, commented on the strength of the recent employment report. Indeed, the news was much rosier than expected. Tim Duy's Fed Watch agreed with market expectations of approximately 170,000 jobs. The WSJ Economic Forecasters expectations were slightly lower at 165,000 and they have typically underestimated payroll employment:
However, the graph above and the graph below hint at the Federal Reserve's continuing conundrum. Payroll employment seems to be consistently beating expectations, but inflation is lower than expected. The WSJ Forecast below is for June 2017 year over year inflation, and the trajectory of actual inflation it seems unlikely that we will break the Fed's two percent target.
The upcoming release of the July WSJ Economic Forecasts may provide more insight to where market participants think the Fed is heading. It is likely that the jobs report will boost both GDP and fed forecasts, but that relies on forecasters optimistic outlook on inflation.