October 16, 2003

Good Industrial Production News

Good industrial production news, but overall the news is not as good as I hoped:

WSJ.com - Economic Recovery Gains Strength: ...the Federal Reserve said industrial production rose a solid 0.4% in September, a turnaround from a drop of 0.1% in August. The consumer-price index... excluding food and energy prices... rose only 0.1%, suggesting that the downward pressure on prices is still a concern for the Fed. Prices are up a modest 1.2% year to year, a 37-year low. Low inflation likely means the key short-term interest rate will be kept at 1% when the Fed meets next, on Oct. 28.... The positive data are consistent with the view of top corporate executives that the economy is rebounding. A new survey by the Business Roundtable, whose members are chief executive officers from the largest U.S. companies, estimates that U.S. gross domestic product will grow at a 3.3% rate in the fourth quarter...

Sigh. I was hoping for a 4% growth rate in the fourth quarter.

Posted by DeLong at October 16, 2003 08:15 PM | TrackBack


Its the Frankenstein Economy: Dug up from the local graveyard, the economy lies on a slab in the basement of the mad scientist Dr. BushNGreenspan's lab. The madman jammed a cable into the nether regions of the beast, and threw the switch. Never before seen levels of electricity flowed into the hulking corpse, but nothing happened.

(Throw the 2nd Switch!)

More and more amperage poured into the lifeless body of the creature. And still no moment, no animus.

(No, not the 3rd switch)

The creature slowly lumbered off the table, dancing this way and that, as more and more amperage was poured into his body.

Now for the big question: When the madmen pull the cable out of the monster, has it been reanimated? Is it alive, or was it merely twitching to the beat of never before seen levels of stimulus? Will it collapse back onto the slab once again when the juice is cut off?

That, IMHO, is the big question with the present economy. Can we defeat the normal business cycle? Can we take a dead piece of inanimate tissue, and by applying historical levels of tax cuts, interst rate cuts, increase monetary supply, devalue the currency, and any other trick you can think of, to defeat the usual refractory period?

Are we seeing the beginnigns of a new cycle, or are we seeing temporary effects of historical levels of stimulus? If its the latter, what sort of problems might this engender if we slump back onto the slab?

Posted by: Barry Ritholtz on October 16, 2003 09:03 PM

Brad, as always, great rag! But you sliced your serve on this production piece. CQ....CQ....CQ.

Let me share some real production news from the front lines. In the PacNW, Georgia-Pacific is dismantling one of its largest paper mills, and Intalco has permanently cut production in half, due to increasing cost of power brought on by energy tradeoff, namely, the spike in natural gas prices after the energy panic of the 90's, when everyone was building gas-fired plants as fast as they could; and the rising costs associated with hydroelectricity, in competition with irrigation and endangered salmon, in an increasingly global- warmed drought region. The Pac NW just had the warmest, longest and driest summer in history, and the power-reservoir snow pack is at zero.

Everyone's fears the energy crisis would explode have come wickedly true, first East Coast and now West Coast. Just wait until winter....

On the national front, I heard from a real estate associate that Fannie Mae is creating a new pool of bond monies to deal with the spiking defaults outpacing refinancing volume, as those 3,000,000 folks who lost their jobs have finally run out of mortgage payments. In essence, Fannie and Freddie are junk status now, like the S&L back in the day.

Everyone's fears the housing bubble would burst have come wickedly true. Where will they go?
"Will work for food" times 3,000,000 dumpsters?

On the global front, I heard from a top engineer in US aerospace that most of their design work is being done by "tele-commuting" Soviet aerospace workers, just as China and Japan are picking off aerospace component manufacturing. And I heard from an IT engineer that outsourcing design to India is also their fastest losses in high tech.

Everyone's fears that technical services would follow manufacturing has come wickedly true, and those millions of jobs lost now, and millions to follow, ARE NEVER COMING BACK AGAIN under WTO.

And heard from a guy on the ground in Afghanistan that everyone is bailing out, they're desparately searching for warm bodies to keep the Kharsai regime in power. In Iraq, reports claim Vinnell is charging US $56,000 for every Iraqi militia cadet they train, about the same as sending your kid to Stanford for four years. Besides the cost of gasoline being supplied by Halliburton being three times the going rate, reports also state front-line tanks and fighter jets are paying many $1000's per gallon. An associate in the Star Wars tells me the "$800 hammer" is back...he just saw an invoice from Bechtel for screws at $50 apiece.

The rumor going around is that once that $87B is safely locked in the Fed kitty, Executive will arm-wrestle the UN into taking over day-to-day work load in Iraq, so the big defense contractors can divvy up all that tax money of ours, stolen from health and eduction, at their leisure. In essence, sloughing the "loss leader" work to the UN, so the maximum profit can be extorted.

Everyone's fears that Iraq would turn into a debacle have come wickedly true, both militarily and financially. Like the Cold War rebate that never happened, we'll never see that $87B again. Instead we're left with a permanent and growing deficit that will be held in mostly foreign-owned treasury bonds. Kiss Social Security goodbye!

But ask yourself, is anyone surprised? We didn't need to cast bones or read tea-leaves, the media was our muse, if we'd only have listened.

The rich and powerful aren't going to go down without stealing the lifejackets from our hands. Why else would they exempt both capital gains and the estate tax, making the wealthy Hampton's and West Palm's elite into neuvo American ROYALTY?

One day this Republican Jack-in-the-box is going to run itself down, and then the payback is Hell. Until then, don't believe anything that smells of green spirit or defending liberty. It's not our liberty they're after....

End of transmission....

Posted by: Surmoss Fimo on October 16, 2003 09:53 PM

surmoss: please use the word wicked only once per post...also: STOP SCARING THE SHIT OUT OF ME!

nevermind, too late...i just decided to de-fund my retirement plan. It wont matter by the time i get to retirement age anyhow.

frankenstein and the end of america in one comment window! lovely....

Posted by: sampo on October 17, 2003 01:11 AM

In addition to any substantive disappointment on the news, this story is quite similar to the type of reporting that Brad was complaining about yesterday w/r/t the initial jobless claims report. The "turnaround" in industrial production is from an August number revised from +0.1% to -0.1%, (compare http://www.federalreserve.gov/Releases/G17/20030915/), the September growth is still lower than July's +0.7%, and production and capacity utilization both are down on SPLY. Better than nothing, I suppose.

Posted by: Tom Bozzo on October 17, 2003 05:20 AM

Real GDP growth near zero in 2001, quite low in 2002, and even below the increase in potential GDP in 2003. My back of the envelope math says we'll need 10% growth in 2004 to get back to full employment. Is anyone predicting 10% growth for next year?

Posted by: Harold McClure on October 17, 2003 06:06 AM

Umm...Fannie and Freddie are both triple A credits, as far from junk as can be. Mortgage defaults have been quite well contained so far, and ratings agencies are not, to my knowledge, looking with any particular disfavor at the MBS market.

The IP data managed to post a modest gain despite a pretty hefty dip in utility output. While it is not as common as looking at retail sales ex-auto or price indexes ex-food and energy, there is a habit among indicator-watchers to strip utility use out of IP data, since utility swings tend mostly to reflect swings in average temperature - not all that economically significant in the short term.

The focus on revisions seem relentless. Folks, data get revised. If you want to watch data, you have to accept that. Revisions matter, but the thing to do is to look at the performance of the series to see how things are doing, using the best data you can get. That will always mean that the most recent data point is unrevised. Paying attention to one month's downward revision, or even a series of downward revisions, can lead one's attention away from the fact that the underlying trend in a data series is improving. In fact, the underlying trend in most real-side indicators is improving. Mixed bag for the financial stuff. Corporate spreads at several-year narrows (good), current account and budget deficit at massive wides (bad) stocks headed up (good) and P/Es looking far more normal that at just about any point in the past several years (good), but still a tad high (bad).

By the way, did you see the housing starts data (including the upward revision to permits)?

Posted by: K Harris on October 17, 2003 06:10 AM

The housing starts data look good on the whole -- and the Reuters story I saw was reasonably balanced as to the up- and down-sides of the data.

I agree with K Harris that the obsession with revisions to economic data can often be unhealthy. The people who are sniffing for conspiracy in the employment data are pretty clearly off the rails, from just about any mainstream economists perspective, it would seem.

My own point w/r/t the IP data is with respect to the tendency in the reporting to reach for strong if not exaggerated modifiers to describe small changes in economic data. Is there a "turnaround" there? Maybe if you look at longer trends, as K rightly suggests, but not really in month-to-month fluctuations.

Posted by: Tom Bozzo on October 17, 2003 06:52 AM

PLEASE help me understand this article:


Ricardo Caballero of MIT believes that the U.S. was in the middle of a generation-long shift to a richer, higher capital-intensity growth path when the NASDAQ crash occurred--and that there is no reason to think that the United States cannot grow in this decade at the same boom-time rates at which it grew in the late 1990s:

Posted by: jd on October 17, 2003 11:04 AM

Harold McClure or K Harris: What did you make of the Ricardo Cabellero article? Though I am not an economist, I can almost always make sense of the ariticles and discussion. Please help me with this one a bit. I am lost.

Posted by: jd on October 17, 2003 11:19 AM

K Harris makes excellent points, especially to the effect that there is no crisis at Fannie and Freddie Mae.

What we are observing, in my opinion, is a slow economic erosion rather than an explosive crisis. There will be robins before everyone concludes that it is not spring. Even then, the winter is likely to settle in slowly rather than announce itself with a sudden blizzard.

The reasons for believing that winter is coming are: the deficits are unsustainable; the indirect damage of the "war on terror" to the economy (e.g., delays related to inspecting cargo, e.g., alienation of prospective students) are substantial but difficult to measure; the rest of the world has caught up on computer technology and biotechnology and is far better positioned for nanotechnology and other leading edge issues; a decline in the dollar, so necessary for reducing the current account deficit will depress the world economy....

The reasons for believing the onset will be slow: deficits of this magnitude took ca. 8 years to sink the economy under Reagan/Bush; there is no internal crisis of the kind that US manufacturing faced in 1981; business is enthusiastic about Bushonomics, so it will take longer than usual for reality to sink in; favorable financial/interest rate stats as cited by KH...

Posted by: Charles on October 17, 2003 12:08 PM


Who, me?

Yeah, I saw your first post so went right to it. Just need to get through my end-of-the-week stuff before I read it again. Best I can say is, I'll try.


Yup, the fact that there is a "lot of ruin in a nation" means it will take time to see whatever bad effects there are from recent bad policy. I was of the view that Q4 would look peaked, since consumer spending seemed to have peaked early in Q3. Recent revisions suggest otherwise, so the base going into Q4 will be pretty good. Thus GDP growth will probably be measured as being fairly strong in Q4 - though nothing like Q3.

The "cutting edge" issue seems a real worry. We need to generate new technology and exploit it before production slips into lower wage regions. That's what we do. If there is a long stretch before a hotsy-totsy new technology is put to work (or the new hotsy-totsy service is offered), domestic income growth is likely to suffer. High wages and no new tricks - bad combination.

Posted by: K Harris on October 17, 2003 12:23 PM


Above is the complete article by Ricardo Cabellero. Well, I also am not sure I understand the argument.

"Does the US really have a structural 'excess capacity' problem at the aggregate level?" I think not. I think that demand save for this quarter has been more constrained than in any other recession recovery since 1945. We have too little demand and monetary and fiscal policy have driven demand high enough for long enough to spur corporate hiring. Apart from this, I am lost.

Posted by: anne on October 17, 2003 12:47 PM

There have been a couple of predictions made and which I will recount here about the effects of the new tax bill that is expected to pass shortly. I have a couple of questions. I'm only a novice and hope that someone might know something about this.

It's been estimated that the amount of money that will "come back" to the U.S. is $400 billion. This will be taxed at a rate of 5.5% instead of the current 35.5%. This will only bring roughly $22 billion into the treasury, mere peanuts. Economists are saying that around $200 billion will go into paying down debt which, although this isn't directly stimulating to the economy, it does lead to better balance sheets which is good for stocks and investment. A part of that should translate into jobs. A sizeable chunk will probably go back overseas since it is now much cheaper to operate there (given the new tax rate). Whatever's left will go to direct investment over here.

Of course, long-term, this policy is dreadful since it encourages corporations to invest overseas and drains much needed revenue from whatever's left of the federal budget. But what are the short term effects, say over the next 18 months? Obviously the Repugs don't care about the long-term - they only care about Nov. 2004. Experience has taught them that they can always claim that high taxes are responsible for the mess and then proceed to cut them further. This will help ensure that Medicare, Social Security and Medicaid are ancient history, and other discretionary services are drastically reduced.

But in the short term, how big of a boost to employment will this be? It is a heck of a lot of cash that will be invested. Does 2 million new jobs sound reasonable? Any economist types that might know more about this? Last thing I want is Bush to be reelected on the basis of policy that is destructive.

Posted by: Jack on October 17, 2003 02:57 PM


I made an attempt at saying something intelligible about the Caballero piece, but couldn't get your e-mail address to connect. Don't want to publish the whole thing here - kinda long and probably wrong anyway. Is "jd@princeton.edu" right? Got it by tagging your initials up above. Send me an e-mail, if you want, and I'll respond with my ramblings.

Posted by: K Harris on October 18, 2003 07:53 PM

It turns out that all the production improvement, according to Ned Davis Research, has come from just three sectors: Technology (+25%), Automotive (+22%) and Energy (+5.5%).

Automotive is easily dismissed: 0% financings and rebates. hardly the stuff of robust recoveries. Indeed, GM made more money last year from mortgages than from selling cars. So if this recovery is for real, and interest rates tick up, that engine of growth is kaput.

Technology is partially an echo of the Y2K upgrade cycle-- but that only explains some of the improvements. There are some real cost saving technologies out there, and they are capturing the lion's share of enterprise installations. Software has been doing much better than hardware; In my opinion, that's because its easier to quantify savings from software than hardware.

Lastly, Energy could be reflecting the increased demand due to stimulus. If the economy was dramatically improving across the boards, I suspect energy demand would be moving even higher.

Bottom line: Core industrial production is still negative year over year. The remaining sectors -- Consumer Goods, Business Equiptment, Business Supplies, and Materials -- comprise 71% of industrial production. The Core Industrial Production (ex - auto, energy and tech) contracted at annual rate of -0.4% last quarter.

Posted by: Barry Ritholtz on October 20, 2003 07:52 PM
Post a comment