Macroeconomic Patterns and Stories

Transcription

1 Macroeconomic Patterns and Stories

2 Contents Parti Introduction 1 Introduction: We Are Pattern-Seeking, Story-Telling Animals Advice: Do Both Patterns and Stories We Can Also Analyze Pictures, Words, and Numbers: In that Order Analytical Thinking: I think I Can Help Forecasting Is a Participant Sport Tell Someone About It: It Will Help You More Than Them WhatNow? Preview: The Key Pattern Data Sources Updated Displays Appendix: Statistical Science Is Severely Limited in Its Applicability Was that 1969 Draft Lottery Random? Was It Fair? Conclusion 16 Part II Four Key Variables: Growth, Unemployment, Inflation and Interest Rates 2 Gross Domestic Product Definitions GDP Is an Imperfect Measure of Economic/ Material Success What Do Those Three Letters Stand For? What's "Gross" About Gross Domestic Product? What's "Real" About "Real GDP" and What Is "Nominal" About "Nominal GDP"? 24

3 x Contents What Does SAAR Mean? What Is an Annualized Compound Rate of Growth? What Does Real GDP Look Like? Does a Logarithmic Scale Help? The Narrow Corridor of US GDP Growth Four Pictures: What Does Growth of Real GDP Look Like? How Much Is $10 Trillion? Does Dividing by Employment Help? 34 Appendix: The Index Number Problem and Chain Indexes 35 Appendix: The Seasonal in GDP Is Very Large 36 3 The Components of GDP: C + I + G + X-M How Might GDP Be Measured? National Income and Employee Compensation How Is GDP Actually Measured? How Big Are the Components: C, I, G, X - M? Which Are the Most Volatile Components of GDP? 45 Appendix: GDP and National Income 49 Appendix: Answer to Footnote Question 49 Appendix: A Better Way to Treat Imports and Exports 49 4 Employment Labor Market Surveys CES: Current Employment Statistics CPS: Current Population Survey Initial Jobless Claims Industry Composition of Payroll Jobs 62 Appendix: Which to Rely on: Business-Reported Payroll Jobs or Household-Reported People-at-Work 62 5 Inflation and Interest Rates A Price Is a Ratio The Consumer Price Index (CPI) Two Views of Inflation Homework Interest Rates on Short-Term US Government Securities The Real Interest Rate: The Price of Durability and the Compensation for Waiting A Look at the Data Interest Rates on Long-Term US Government Securities and Monetary Policy The Term Structure of Interest Rates: Theory Real Returns on One-Year and Two-Year Treasuries 80

4 Contents xi 5.7 What Determines the Shape of the Yield Curve? Why Is the Yield Curve Generally Upward Sloping? Why Is the Yield Curve Sometimes Steep and Sometimes Inverted? What Determines the Level (Not the Slope) of the Yield Curve? 85 Appendix: Q and A from BLS Web Site Regarding the CPI 86 Appendix: Risk Characteristics of Bonds 88 Summary 90 6 Extrapolative Forecasting Regression Toward the Mean Forecasting and Regression Toward the Mean Persistence, Momentum Pictures that Help to Understand the Numbers Stories that Help to Understand the Numbers 99 Part III A Recession Symptoms 7 Unwanted Idleness: Recessions and Recoveries Worker Idleness: Unemployment The NBER Definition of a Recession Isn't So Great Identifying the Recessions in the Unemployment Data Is Child's Play Capital Idleness: Capacity Utilization in Manufacturing Work Intensity: Hours per Week in Manufacturing Five Episodes: Normal Growth, Sputters, Spurts, Recessions and Recoveries Recession Comparison Charts Ill 8.1 Recession Comparisons: Employment and Output Ill Payroll Employment Ill Real GDP Idleness Household Unemployment Rate Capacity Utilization in Manufacturing Hours per Week in Manufacturing Other Indicators Industrial Production Employment in Manufacturing and Construction Numbers 121

5 xii - 4 Contents 9 Who Struggles and Who Does Well in Recessions? Job Losses in Recessions Affect Some Sectors More than Others The 2001 Recession Was an Anomaly With that Anomalous 2001 Recession, What Will the Next Recession Be Like? Many Sectors Lose Profits in Recessions 133 Part III B Recession Stories 10 Idleness Stories How Do Economists Explain Unwanted Idleness? The Job Cycle Is Mostly Construction and Manufacturing Broken Relationships Soaking the Rich When Times Are Bad Making Do with the Old Car A Pyrrhic Victory of Hope Over Reason 150 Appendix: Supply and Demand Models of Unemployment Cycle Stories The Harrod-Samuelson Multiplier-Accelerator Model Some Acceleration Facts The Supply Chain Bull-Whip Rush to Exploit New Ideas The Intensive Margin and the Extensive Margin The Simple Agronomy of an Idea Rush Kondratieff Long Waves Ponzi Schemes and Asset Bubbles Housing Bubbles 171 Part III C Recession Early Warning Signs 12 Clues: Temporal Ordering of Components of GDP Help from Sherlock Holmes Contributions to GDP Growth Normal Trend Contributions to GDP Growth Abnormal Cumulatives Average Temporal Orderings: It's a Consumer Cycle, Not a Business Cycle Eight Consumer Cycles, a Disarmament Downturn, and an Internet Rush Comeuppance The 1953 Department of Defense Downturn The 2001 Internet Comeuppance Housing False Positives and False Negatives 195

6 Contents xiii 12.6 A Story of the Consumer Cycle: Our Collective Bipolar Disease Numbers, If the Pictures Are Not Enough A Regression Analyses to Support What the Pictures Say A Summary Table Summary 201 Appendix: Normal Contributions in Three Episodes More Clues: Episodic Forecasting with Components of Conference Board's Index of Leading Indicators Components of the Leading Indicator Index Forget that Expectations Variable Only a Few of Those Components Predict Oncoming Recessions Combining the Components into an Overall Index 211 Appendix: Description of Leading Indicators 214 Part III D Recession Causes 14 The Art of Drawing Causal Inferences from Nonexperimental Data Post Hoc Ergo Propter Hoc Cause = Intervention Our Hypothetical Interventions Are Very Few There Are Many Roadblocks in the Way of Causal Inferences We Can Pretend to Draw Causal Inferences, Even If We Cannot Do It Use Biological, Not Mechanical Metaphors In Search of Recession Causes What Are We Looking for? Fiscal Policy Seems to Both Cause and Prevent Recessions The Department of Defense Is Implicated in the 1953 and 1969 Downturns Federal Taxation Might Matter The Causal Path Through Houses and Cars Housing Predicts Recessions Consumer Durables Spending Predicts Recessions Housing and Consumer Durables Are Predicted by Interest Rates Not So Fast The Fed Raises Short-Term Interest Rates at the Ends of Expansions Spillovers from Housing: The Wealth Effect or Not? Two Stories of How Monetary Policy Causes Recessions. 255

7 xiv Contents Appendix: Two More "Causes" 258 Oil Price Increases Preceded Some of the Recessions 258 Weakness in Exports Has Not Caused US Recessions 258 Part IV Expansions: With and Without Spurts 16 The Life Cycle of US Expansions: Sputters and Spurts Production and Employment During Expansions Real GDP Grows During Economic Expansions Labor Markets Sometimes Tighten Twice During Expansions Cycles in Hours and Unemployment Spurt Comparison Graphs What Caused the Spurts? A Big Fiscal Stimulus Has Three Times Rejuvenated a Sputtering Economy The Reagan Spurt Was Helped by Falling Interest Rates, Falling Oil Prices and a Falling Value of the Dollar (Which Stimulated Exports) Animal Spirits and the Mad Dash for the Web Drove the Clinton Spurt 279 Appendix: Presidents and Fed Chairmen 280 Part V The Longer Run: Savings, Investment, Government Borrowing, Foreign Lending and Your Home 17 Savings and Investment The NIPA Definition of Savings: It Is Not What You Think Investments Are New Homes, New Offices, New Factories, and New Equipment Flows and Not Stocks Savings Depends on What Consumption Is Do We Save Enough? US Savings in How Much Should We Save? Do We Save Enough? Another Important Accounting Identity: Savings = Investment US Savings and Investment What If There Is a Big Tax Cut and Public Savings Declines? Crowding Out, Ricardian Equivalence, or Twin Deficits in the 1990s? 297

8 Contents xv 18 Government Government Purchases of Goods and Services Are Not as Great as You Think It's Transfers Transfers Are Done also by State Governments Those Transfers Are Mostly Social Security, Medicare, and Medicaid The States Do Not Run Deficits An Accounting Scandal to Rival Enron: Phantom Assets Created by Government Borrowing The Outstanding Federal Debt Is Great Enough to Be Worrisome The Real Effect of the Federal Deficit: Trickle-Down Social Responsibilities Being a "Grown-Up" The Debate over the Privatization of Social Security Is Confusing All of Us The External Deficit and the Value of the Dollar Hu's in Charge? An Important Accounting Identity: The Current Account = The Capital Account What Determines the Value of the Dollar and the External Deficit? The Exchange Rate The Real Exchange Rate The Demand and Supply of US Dollars US Deficits: Good or Bad? How Can the US External Deficit Close? Capital Account Adjustment: Foreign Investors Go Elsewhere Capital Account Adjustment: More US Savings Current Account Adjustment: Barriers Against Imports The Ups and Downs of Real Estate Values Household Assets and Liabilities It Is Not Real Until You Realize It What Determines the Price and What Determines the Value of Your Home? The Rental Market and the Ownership Market Do not Confuse the Rental Market and the Ownership Market Survivor Investing Can Temporarily Disconnect Earnings and Valuations Survivor Investing Requires a Good Story 337

9 xvi Contents Fundamental Valuation Depends on the Growth of Earnings and the Discount Rate A House Has a p/e Ratio, Too The p/r Ratios in US Cities Some Realities of a Very Imperfect Ownership Market: The Very Persistent Gap Between Values and Prices Home Appraisals: Bob's $1 Million Tie Hormones and Housing: It's a Volume Cycle Not a Price Cycle 344 Appendix: Homework re the LA Market 349 Appendix: Home Ownership Data from the Survey of Consumer Finances 350 Appendix: Rents or Asset Prices in the CPI? 351 Owner-Equivalent Rent 351 Appendix: There Is no Such Thing as a Housing Shortage 352 Supply Restrictions Do not Guarantee that Prices Can Only Go Up 353 Index 355