January 06, 2004
A Disappointing "New Factory Orders" Number

A disappointing "new factory orders" number for November: New Orders for Factory Goods Sank in Nov: The fall reflected a revised 2.5 percent drop in orders for expensive, long-lasting durable goods and a 0.2 percent drop in goods expected to last less than three years. The report showed a decline in orders in several categories in November. Demand for transportation equipment tumbled 1.3 percent and orders for computers and electronic products plunged 10.7 percent. Orders of non-defense capital goods excluding aircraft, which economists use to gauge business spending plans, fell 5.1 percent. One bright spot in the report was machinery orders, which climbed 2.1 percent. Excluding defense, orders were down 1.3 percent and excluding transportation, orders fell 1.5 percent......

Posted by DeLong at 08:13 AM

December 31, 2003
The Conference Board Turns Way Optimistic

The Conference Board shifts its forecast and turns way optimistic. Productivity growth of 3.6% forecast for 2004, trend labor force growth of 1.1%, an extra 0.5% growth in the labor force as discouraged workers start looking for jobs, and an 0.5% decline in the unemployment rate together add up to a forecast growth rate of 5.7%. They could very well be right. I can see it all on the supply side. I cannot quite see where all the demand will come from yet: 2004 Economic Forecast Best in 20 Years, Conference Board Reports: ...Revising its year-end economic forecast sharply upward, The Conference Board today projected that real GDP growth will hit 5.7% next year, making 2004 the best year economically in the last 20 years. The forecast, by Conference Board Chief Economist Gail Fosler, expects worker productivity, which set a 20-year record in the third quarter, to rise at a healthy 3.6% next year. That would follow a gain of 4.3% this year. The economic forecast is prepared for more than 2,500 corporate members of The Conference Board's global business network, based in 66 nations. "Growing business spending and continued strength in consumer spending are generating growth throughout the U.S....

Posted by DeLong at 08:55 AM

December 26, 2003
Retail Sales

The Financial Times's Neil Buckley reports a disappointing Christmas for U.S. retailers: FT.com Home US: US retailers are relying on a post-Christmas surge to hit their holiday sales targets after the pre-Christmas period fell short of expectations. Forecasters and retailers had looked forward to a sharp rebound this year, fuelled by a recovering economy, after a holiday season last year that was by some measures the worst for 30 years. But while higher-income shoppers have opened their wallets, bolstering upmarket retailers' sales, lower-income shoppers have remained cautious. Another factor skewing the results has been rapid growth in gift cards and certificates, estimated to account for 8-10 per cent of holiday sales this year. Retailers book revenues from these when they are redeemed by their recipients, not when they are first sold. Wal-Mart, the world's biggest retailer, said on Friday that a rush in the days before Christmas had not been enough to lift monthly same-store sales growth, from stores open at least a year, above the low end of its 3-5 per cent forecast......

Posted by DeLong at 01:48 PM

December 24, 2003
Not Good News for Investment

Durables orders hit a rough spot: Durables Orders Plunge Unexpectedly (washingtonpost.com): New orders for long-lasting U.S. manufactured goods plunged unexpectedly in November, falling at the steepest rate in more than a year across a broad range of categories, a government report said on Wednesday. The Commerce Department said orders fell 3.1 percent to a seasonally adjusted $180.07 billion -- defying Wall Street economists' expectations for a 0.8 percent rise. It was the biggest monthly orders decline since a 6 percent tumble in September 2002 and followed a revised 4 percent increase in October. Every single category of durable goods suffered weaker demand in November, with orders for everything from computers and aircraft to new cars and defense goods falling. The category the Commerce Department calls non-defense capital goods excluding aircraft orders, which is seen as a proxy for business spending plans, fell 5.9 percent to a seasonally adjusted $55.59 billion. It was the biggest decline in this segment in more than 1-1/2 years since a 7.8 percent fall in March 2002... I can understand producer durables falling. But consumer durables?...

Posted by DeLong at 06:23 AM

December 23, 2003
The Walmart Index

More on the Walmart Index: When Paycheck Is Low, Discount Retailers Have Pull: Living from paycheck to paycheck is the norm in the United States, economists say, and Wal-Mart's cash registers offer some proof of that. For more than a year, the retailer says, it has detected spikes in sales twice a month, around the 1st and the 15th, which is about the time that many people are paid. Visits to Wal-Marts around the country last week, at the height of the holiday shopping season, found many shoppers feeling squeezed - the Murphys on Long Island, the Dukes family in Georgia, the Lawrences and the Olsons near Seattle, and others as well. ''For many Americans, especially those with children who are living paycheck to paycheck, Christmas is seen as a time of financial crisis," said Stephen Brobeck, executive director of the Consumer Federation of America, an advocacy and education organization in Washington. "The group has grown as the result of rising unemployment and increasing consumer debt." Though there are some signs that the economy is healing - in the form of bigger Wall Street bonuses, for example, and increasing corporate profits - income has remained mostly flat for many workers,...

Posted by DeLong at 09:12 PM

December 22, 2003
Oh Cr**!

The Wal-Mart indicator is not very happy: FT.com Home US: Wal-Mart warned on Monday that sales were still tracking at the low end of its target range for December, in the latest sign that holiday retail sales in the US could be lacklustre. Forecasters and retailers had been looking for a sharp rebound in sales from last Christmas, when, by some measures, sales growth was the slowest for 30 years. The National Retail Federation, the industry lobby group, forecast total holiday sales would increase 5.7 per cent, year on year - the strongest increase since 1999 - compared with only a 2.2 per cent gain last year. It said on Monday it was sticking to its forecast. But Wal-Mart, the world's biggest retailer, which accounts for about 8 per cent of non-automotive retail sales in the US, warned for the second week running that sales from stores open at least a year were still towards the low end of its 3-5 per cent projected range. As in the previous week, it said fewer people visited its stores than in the same week last year, although average purchase sizes were up.......

Posted by DeLong at 05:27 PM

December 16, 2003
The Wal-Mart Consumer Purchasing Index

The Financial Times's Amy Yee covers the Wal-Mart index: FT.com Home UK: Wal-Mart dampened hopes for strong holiday sales as it announced expectations that US December same-store sales growth would be at the low end of a 3-5 per cent growth forecast. In a weekly sales summary, the world's largest retailer said more consumers were delaying holiday shopping and buying gift cards, which are not recorded as revenue when purchased. Richard Hastings, analyst at Bernard Sands, said: "Wal-Mart shoppers are a huge aggregation of American society. The sales reflect that there are a lot of households insufficiently funded for the future," said Mr Hastings. "If you're an observer, you need to be very worried about this." Wal-Mart said that a decline in traffic reflected a consumer trend to shop later in the month. Sales were strongest in the south-east and mid-Atlantic regions. Wal-Mart accounts for about 8 per cent of US retail sales, excluding cars, making it an important barometer of consumer behaviour......

Posted by DeLong at 09:12 AM

December 12, 2003
Disappointing Consumer Confidence Number

*Sigh*: CBS News | Consumer Confidence Slips | December 12, 2003 12:15:47: Consumers have turned more cautious after deciding that all the talk of an improving U.S. economy may still be just so much hot air, according to researchers at the University of Michigan. The consumer sentiment index fell Friday to a reading of 89.6 in early December from 93.7 in November. The decline was unexpected. The consensus forecast of Wall Street economists was for sentiment to improve to 95.6. Consumer sentiment has risen sharply since hitting a 10-year low of 77.6 in March. However, consumers cited fewer gains in wages as the primary reason for concern about their personal financial situation in early December. Growing impatience by consumers for their personal financial situation is typical after an initial surge in confidence tied to a recovering economy, researchers said. Consumers soon begin to wonder when the improving economy will translate into higher wages or a better job. "The data make it clear that consumers are counting on more rapid job growth in the months ahead, and without that growth in employment, confidence will quickly wane," the University of Michigan research team said. Let's hope this doesn't have much depressing effect on...

Posted by DeLong at 01:14 PM

November 29, 2003
No Coherent Narrative...

The shape of consumer demand this Christmas is still very unclear: Holiday retail sales expected to be jolly, not jubilant. - Nov. 28, 2003: ..."The consumer is jittery," said Hastings of Bernard Sands. "Rising debt levels, inflation and higher gasoline prices are all real threats and a drag on spending." Despite signs of a pickup in the economy and an improving labor market, consumers don't appear to be feeling the Yuletide cheer. "The economy still has to prove itself and create millions of new jobs," Hastings said. "The consumer is excessively dependent on all forms of credit for spending." The Conference Board in a survey Monday said U.S. households on average are expected to spend $455 on gifts this year, down 5 percent from 2002. "The 5 percent drop is shocking," said Delos Smith, economist with the Conference Board, a New York-based business research group. "It indicates that perhaps the consumer tax rebate stimulus that benefited retailers during the back-to-school season has petered out." Additionally, a survey from the Consumer Federation of America and the Credit Union National Association said 34 percent of consumers polled said they would spend less during the holidays this year compared to last year. Wal-Mart...

Posted by DeLong at 05:02 PM

November 28, 2003
Expectations of Christmas Sales

The Christmas shopping season has started, with mixed expectations: Retailers Usher in the Holiday Season: ...Stores have steeled themselves for a shopping letdown, with inventories that average 7 percent below last year's levels. Merchants like Sears, Roebuck and Co., Staples, K-B Toys, and several major mall operators reported that traffic and business as of Friday afternoon were at least as healthy as a year ago. No must-have item has emerged this season, although the best sellers in toys include Fisher-Price's Hokey Pokey Elmo, Spin Master's Mighty Beanz collectible plastic toys, MGA Entertainment's Bratz dolls and Mattel's Hot Wheels T-Wrecks playset. Michael Niemira, vice president of Bank of Tokyo-Mitsubishi Ltd., predicted a sales gain of 4.5 percent for the November-December period, the best performance since 1999, when the tally rose 5.4 percent. He based the estimate on sales from stores open at least a year, considered the best indicator of a retailer's health. Last holiday season's results were unchanged from 2001. The Washington-based National Retail Federation projected total holiday sales to rise 5.7 percent to $217.4 billion....

Posted by DeLong at 09:42 PM

November 25, 2003
Yet Another Bear

The Economist's Buttonwood Tree turns out to be a bear in disguise. Who'd a thunk it? Economist.com | The Buttonwood column: ...investors sense a chill beneath the warm glow of the numbers. One cold wind blowing across this particular recovery is that Americans are up to their necks in debt. With short-term interest rates at a 45-year low, households are spending some 13% of their disposable income on servicing their debts—a higher number even than in the sharp recession of the early 1980s, when the Federal funds rate topped 13%. How much longer can they carry on spending at this rate, let alone increase it? If they don't, then someone else will have to spend on their behalf. The government, perhaps? The Bush administration has turned a budget surplus of 2.4% of GDP into a deficit that official numbers say will amount to 4.3% of GDP next year. Not much room, in other words, to raise spending. Nor do American companies have oodles of money to play with. For all the talk of restructuring, they continue to increase their borrowing, though at least a slowdown in the rate at which they borrow and better profitability mean that their dreadful financial...

Posted by DeLong at 03:18 PM

November 24, 2003
The National Association of Business Economists Raises Its Forecast

The NABE raises its forecast of economic growth for 2004: Yahoo! News - Economists Predict Strong Growth in '04 : ...a NABE forecasting panel predicting the jobless rate will average 5.8 percent in 2004, down from 6 percent currently. The forecasting panel saw payroll employment rising by 1.1 percent, or about 1.3 million workers, not enough to replace the 2.3 million jobs that have been lost since Bush took office in January 2001. While Democratic opponents are expected to point to weak job growth as a sign of Bush economic failures, the White House is apt to contend that the stronger economic growth is an indication that the president's tax cuts are starting to work. The NABE outlook, assembled by a panel of 28 forecasters from various industries, predicted that the overall economy, as measured by the gross domestic product, or GDP (news - web sites), will grow by 4.5 percent in 2004......

Posted by DeLong at 08:49 AM

November 21, 2003
The Output Gap and Equilibrium Real Interest Rates

I do not understand Morgan Stanley's Richard Berner: Morgan Stanley: ...The output gap is the difference, in percentage points, between the level of potential and actual GDP, and as such measures economic slack.  It is a more comprehensive measure of the gap between actual and potential output than the factory utilization rate, which covers only about one-fifth of economic activity. Although many factors determine inflation — including inflation expectations, supply and demand shocks, and unit costs — other things equal, this slack in the economy tends to depress price change.  Currently, the output gap is wide; three years of subpar growth have opened up the gap to about 2% (that it is not wider reflects our belief that growth outstripped its potential in the 1990s boom, pushing the gap into positive territory, and the fact that the recent recession was the mildest in postwar history)... But... But... But... if output was well above potential in the mid- and late-1990s, why wasn't inflation rising faster? "Output above potential" has to mean strong upward pressure on the rates of increase of wages and prices, or it means nothing at all. And if the economy was roughly at or slightly above potential in the...

Posted by DeLong at 10:15 PM

November 19, 2003
Good News on Residential Construction

Good news on residential construction: Housing starts explode, set fastest pace since '86 - Nov. 19, 2003: New home construction in the United States accelerated in October to the fastest pace in nearly 18 years, the government said Wednesday, defying Wall Street forecasts for a slowdown. And the ever-rising flood of new homes appeared to be supported by demand, some economists said, indicating home prices were unlikely to be artificially inflated into a dangerous "bubble." The Commerce Department said the pace of housing starts rose 2.9 percent to a seasonally adjusted annual rate of 1.96 million units, after rising a revised 4 percent to 1.91 million units in September. Economists, on average, expected housing starts to fall to a 1.85 million-unit pace, according to Briefing.com......

Posted by DeLong at 08:06 AM

November 18, 2003
Good News on Inflation

Good news on inflation--since we're no longer worried about deflation, that is: Consumer prices flat in October - Nov. 18, 2003: ...The Labor Department reported that the consumer price index (CPI), a broad measure of prices paid by consumers, was flat in October after rising 0.3 percent in September. Economists, on average, expected CPI to rise 0.1 percent, according to Briefing.com. Excluding volatile food and energy prices, the so-called "core" CPI, rose 0.2 percent, after rising 0.1 percent in September. Economists expected core CPI to rise 0.1 percent, according to Briefing.com. U.S. stock market futures had little reaction to the report, pointing to a positive opening on Wall Street. Treasury bond prices rose. The report seemed unlikely to change the Federal Reserve's view that inflation is a distant threat to the economy, and it could support fears of a continued slowdown in consumer inflation......

Posted by DeLong at 07:18 AM

November 17, 2003
Actual and Potential Output

When industrial capacity utilization--as estimated by the Federal Reserve Board--falls one percentage point below its average of 82%, real GDP falls about 0.6 percentage points relative to the economy's productive potential. The industrial sector is a cyclically-sensitive one, and its relative cyclical movements are more than half again as great as those of the economy as a whole. We can use this statistical relationship to get an idea of the relative movements of real GDP and the American economy's productive potential over the past generation and a half: The naked eye, gazing at this figure, can easily discern two things: The acceleration in the rate of GDP growth in the mid-1990s as the technological revolutions in information and communications technology reach critical mass and significantly affect the growth rate of the economy's productive potential. The two great shortfalls of output relative to potential in the past generation and a half--the Volcker disinflation recession of 1980-1983 and the current shortfall of output relative to potential--are of roughly similar magnitude. I remember the 1980-1083 Volcker disinflation. This current episode--although the shortfall in capacity utilization and in output relative to potential is as great and has gone on for as long--does not feel...

Posted by DeLong at 12:50 PM

November 15, 2003
Capacity Utilization

The Economic Policy Institute plots the Federal Reserve's capacity utilization index--how far the U.S. economy is below its productive capacity. By this measure, the total amount of idled economic capacity as a result of the current recession is already larger (as a percent of potential output) than in any post-WWII recession save 1981-1984--and we are rapidly closing in on that one as well: Economic Snapshots: ...There remains a lot of slack in the U.S. economy. One measure of economic slack is the capacity utilization rate, tracked by the Federal Reserve, which gauges the degree of slack in capital equipment in the U.S. economy. This provides a measure of how much of the economy's potential productive capacity is in use in a given quarter. Full capacity generally occurs before this index reaches 100. The average capacity utilization rate in the U.S. economy since 1967 is 81.6%. Of course, this measure of business cycle performance is a measure of business cycle performance: one principal reason that capacity utilization is so low is that the economy's productive potential is growing so fast as businesses take advantage of the steep and ongoing fall in the price of information technology capital....

Posted by DeLong at 07:28 AM

November 14, 2003
How Fast Will Profits Grow?

The Economist appears to think that the American stock market is overvalued: Economist.com | America's business recovery: ...Although executives now feel under less market pressure since the discrediting of the Wall Street sell-side analysts who pushed them to have ever-shorter time-horizons, they still hear the market's call. And the current stockmarket rally has pushed the Dow Jones Industrial Average back towards 10,000, where it last stood in May 2002. As investors' expectations about future profits growth are inflated by rising share prices, a "natural pressure build"?, says Jim Andrews of the Boston Consulting Group. In lean times, says Mr Andrews, firms tend to invest fewer of their R&D dollars in new "breakthrough"? products or services. Their spending is focused instead on maintaining the competitiveness of existing products. By its nature, restructuring diminishes future opportunities for growth. This makes the current expectations of investors in American shares look all the more unrealistic. Analysts are forecasting that corporate profits will grow by some 11% a year for the next five years. But the long-run performance among S&P 500 firms is only 7% a year. Few of America's top managers, however, yet seem to be in a mood to take on the kind...

Posted by DeLong at 11:59 AM

Notes: Employment Picture

The Economic Policy Institute has a nice piece on understanding the severity of the current labor slump......

Posted by DeLong at 11:51 AM

More Neutral Economic News

A couple of pieces of news that I thought would be good turn out to be a little bit worse than I was expecting: Rapid City Journal: Serving Rapid City South Dakota: America's shoppers tightened their belts for the second straight month in October, and prices at the wholesale level shot up by 0.8 percent -- the largest increase in seven months, the government reported Friday. The back-to-back declines in retail sales -- they fell by 0.3 percent last month and 0.4 percent in September -- came after consumers went on a shopping spree during the summer, the Commerce Department reported. Economists had predicted the hot pace could not be sustained.... The rise in wholesale prices was much larger than the 0.2 percent rise that economists were forecasting. October's jump...reflected sharply higher prices for food, especially for beef and veal, as well as car and truck prices as generous incentives were scaled back. And, the Federal Reserve reported that industrial production rose by 0.2 percent in October, down from a 0.5 percent gain in September. October's increase was half the size of the 0.4 percent increase that economists were calling for......

Posted by DeLong at 10:21 AM

November 13, 2003
Strange Third Quarter News From WalMart

WalMart doesn't seem to have seen the same third-quarter spending boom that the NIPA estimates did, which is quite strange. Something seems to be wrong with our collective visualization of the Cosmic All: Forbes.com: Wal-Mart dumps cold water on U.S. economic bulls: CHICAGO, Nov 13 (Reuters) - Economists and politicians giddy about prospects for U.S. economic growth got a dousing of cold water on Thursday from Wal-Mart Stores Inc.(nyse: WMT - news - people), the world's largest company. The retailer -- which taps directly into the psyche of the U.S. consumer -- gave a downbeat economic outlook that contrasted with reams of recent data, and bluntly suggested that many of its shoppers are barely making ends meet. Customers continue to buy the cheapest items in any given category -- a sign that household budgets remain tight, Lee Scott, Wal-Mart chief executive officer, said on a recorded message. Buyers are "timing their expenditures around the receipt of their paychecks, indicating liquidity issues," Scott said. "I don't think consumer spending is slowing, but I also don't see the strength that many of you in the investment community appear to see," Scott said. Wal-Mart's sober outlook came after the U.S. economy enjoyed its...

Posted by DeLong at 01:11 PM

November 10, 2003

Stephen Roach is still gloomy. I'm still gloomy about unemployment, but it's hard to be gloomy about other aspects of the economy given the very strong productivity growth trend: Stephen Roach: ...As of October 2003, the private job count was still down nearly 1% from the level prevailing at the official cyclical turning point in November 2001. By my reckoning, that still works out to a cyclical shortfall of close to 7 million jobs — the number of Americans who would have been at work in the private sector had the current hiring recovery conformed to the cyclical norms of the past. In short, while the US appears to have transitioned from a jobless to a job-short recovery, it’s a real stretch to argue that hiring has now reached the critical mass that sparks cumulative cyclical increases in the real economy.... in my view, there are some equally critical differences between the state of today’s US economy and conditions prevailing in the upturn of the early 1990s — differences that challenge the notion that a comparable transition is about to begin. That’s especially true of consumer balance sheets: Today, household sector debt stands in excess of 80% of GDP, well...

Posted by DeLong at 07:43 PM

November 06, 2003
Peering Into the Crystal Ball

The always-wise John Berry of the Washington Post peers into his crystal ball and tries to gauge the future of the economy: Greenspan Sees Job Market Poised for Growth (washingtonpost.com): ...Many forecasters, such as Joe Liro of Stone & McCarthy, a financial markets research firm, currently are predicting that economic growth will run at about a 4 percent annual rate in 2004 with productivity slowing to what Liro called "a still remarkable 3 percent rate or so." That combination of economic and productivity growth would be consistent with some job creation, but with the working age population expanding about 1 percent a year, there would not necessarily be enough jobs added to bring down the nation's 6.1 percent unemployment rate. In his speech, Greenspan said that in the past, during recoveries following recessions, the Fed has had "to move aggressively" to raise interest rates to keep inflation contained. But this time inflation "has been running only a little more than 1 percent over the last year, and firms exhibit scant evidence that they are gaining appreciable pricing power despite the pickup in the pace of economic growth. . . . In these circumstances, monetary policy is able to be more...

Posted by DeLong at 12:32 PM

Greenspan Gives a Nuanced View

Alan Greenspan gives a nuanced view of the current economic situation. He expects the economy to grow at a rate of between 3.5 and 4.0 percent over the next year or so, and expects employment growth to pick up (although probably does not expect significant falls in the unemployment rate): Greenspan: Odds favor job growth, worries about deficit - Nov. 6, 2003: Greenspan... said "the odds ... increasingly favor a revival in job creation," which wouldn't come a moment too soon for the health of the broader economy. But, he says, if employment does not start to grow, a return of slow-growth stagnation is very possible: "Unless hiring picks up and layoffs ease, assuaging the latent job security fears of many of those currently employed, the share of income spent could decline, a development that would hamper the vigor of the expansion," the central bank chairman said. The large wedge being driven between output growth and slow or zero employment growth is the result of what is amazingly good news about productivity--but future news about productivity is unlikely to be as bright: Greenspan said the economy was able to grow in the third quarter at the fastest pace in nearly...

Posted by DeLong at 09:50 AM

November 03, 2003
The State of the Business Cycle

Notes for my talk today for the Berkeley Faculty Forum Lunch on the state of the business cycle....

Posted by DeLong at 10:57 AM

A Piece of Good News for the Fourth Quarter

A piece of good news for the fourth quarter: consumer demand may be easing off, but manufacturing production is accelerating: ISM manufacturing index surges - Nov. 3, 2003: NEW YORK (CNN/Money) - U.S. manufacturing activity accelerated in October, the nation's purchasing managers said Monday, in a report that surpassed Wall Street expectations. The Institute for Supply Management (ISM) said its index of manufacturing activity rose to 57 from 53.7 in September. It was the fourth straight month the ISM index was above 50, a number that indicates expansion in the sector. Economists, on average, expected the ISM index to rise to 55.8, according to Briefing.com. "This is the best report that we have seen in quite some time in terms of the overall strength of manufacturing," said Norbert Ore, chair of the ISM Manufacturing Business Survey Committee. "The picture continues to improve, and it appears that manufacturing will finish 2003 on a very positive note, assuming the recent trend continues."......

Posted by DeLong at 08:17 AM

October 31, 2003
Last Summer's Boom

The Angry Bear has some very nice and interesting thoughts about last summer's economic boom: : Explaining the GDP BoomFurther insight into yesterday’s big GDP numbers was provided by the release this morning of the September personal income and spending data by the BEA. Both income and spending were sharply lower in September compared to August. The reason? Overwhelmingly, it was because of the end of the one-time tax rebates sent out over the summer. In the graph below, you can see the big bump in both disposable income and consumer spending in July and August, which was almost entirely due to the tax rebates.What does this mean? Three things.First: this provides strong evidence that the huge increase in GDP last quarter, which was powered largely by consumer spending, was largely due to the tax cut. Good old fashioned Keynesianism, as AB pointed out. The mortgage refinancing boom helped some, too, but the lion’s share of the credit goes to the tax cuts.Second: this suggests that last quarter’s GDP figures were an aberration. The fourth quarter will most likely not be nearly as good, since the tax rebates have now been spent and their impact on the economy is pretty...

Posted by DeLong at 03:08 PM

A Piece of Bad Economic News for the Fourth Quarter

A piece of disappointing news for growth in the fourth quarter: Consumer spending dips 0.3% in September - Oct. 31, 2003: The Commerce Department said personal income rose 0.3 percent after rising a revised 0.3 percent in August. Economists, on average, expected it to rise 0.2 percent, according to Briefing.com. Spending by consumers, which accounts for about 70 percent of the nation's economic activity, fell 0.3 percent after rising a revised 1.1 percent in August. Economists, on average, expected spending to fall 0.1 percent... That's a big enough piece of bad news to cause me to take a full percentage point off my personal estimate of the fourth quarter GDP growth rate......

Posted by DeLong at 06:20 AM

October 30, 2003
Yes! Good GDP News!

Today's Gross Domestic Product News Release tells us that the preliminary estimate is that real GDP grew in the third quarter at a 7.2% annual rate. In addition, equipment investment grew at a 15.4% annual rate--a sign that the long pause in business investment may finally be over....

Posted by DeLong at 06:39 AM

October 29, 2003
Forthcoming Economic News

About five hours from now the Department of Commerce is going to release its first early estimate of the seasonally-adjusted pace of economic growth in the third, summer quarter of 2003. It will be a big number--growth at an annual rate of 6.0% per year or more. [UPDATE: It turned out to be 7.2%] Sometime in the following week, the Labor Department will combine that estimate of the rate of economic growth with its own estimates that the number of hours worked in America fell at an annual rate of 0.7% per year during the summer. It will then announce an estimate of the annual rate of productivity growth over the summer--something close to a 7.0% annual rate. [UPDATE: My current guess is 8.0%] How can such strong output growth coexist with such lousy employment news? It is this year's great economic data mystery. Everyone believes that it cannot last. Either (i) firms will find themselves unable to meet rapidly-growing demand with their current labor force, and will start hiring at a furious pace, rapidly expanding employment; or (ii) households will take a look at their less-than-certain employment prospects, cut back on spending, and the pace of demand growth will...

Posted by DeLong at 10:07 PM

October 27, 2003
Business Cycle Optimism

Morgan Stanley's Richard Berner believes that we can finally see a sustainable rapid-growth recovery ahead. He thinks real GDP growth over the next year and a half is as likely to be above 4 percent per year as below it. If he is right, we might finally see the unemployment rate start to drop below 6 percent... Morgan Stanley: ...It was fun while it lasted, but US final demand is cooling from a sizzling 7% summer pace, and many believe that this deceleration is the prelude to a more lasting slowdown in growth. After all, the pessimists believe, massive summer tax cuts and a record mortgage refinancing boom largely fueled the advance; with both of these sources of stimulus fading and scant job gains to recharge income, the payback could be significant and lasting. I disagree. To be sure, the summer demand surge ran at an unsustainable clip, but in my view the inevitable deceleration will be short-lived. That's because production is finally scrambling to catch up with demand in time-honored cyclical fashion. In turn, rising production will begin to generate jobs, and the acceleration in output will lift growth in capital spending. If anything, I see the risks to...

Posted by DeLong at 10:51 AM

October 22, 2003
Good News from Transportation

Good news from the transportation industries: WSJ.com - As Volumes Pick Up, Shippers See Economy Gaining Traction: ...For the first time since the economy began slowing three years ago, many of the country's largest transportation companies are seeing signs of a broad-based recovery that appears to have staying power. The turnaround is coming in sectors that handle the vast bulk of goods transported domestically: railroads, trucking and package delivery. Their performance is considered a leading indicator of future economic growth, because many of the items they carry are used as raw materials in industrial production and for replenishing inventories. The companies, which closely monitor their biggest customers' own future expectations, say they are seeing increased demand across a broad swath of industries, from manufacturing and chemicals to retailing and lumber......

Posted by DeLong at 09:58 AM

October 20, 2003
Today's Macroeconomic News Is Mixed

The Wall Street Journal's Greg Ip reports on mixed macroeconomic news: WSJ.com - Leading-Indicators Index Falls 0.2%: ...The Conference Board said its index of leading indicators fell 0.2% in September, the first decline in four months. "The economy is improving ... although the road ahead will likely remain bumpy," said Ken Goldstein, an economist for the independent business-research group. Economists estimate the economy grew at a blistering 6.1% annual rate in the third quarter ended Sept. 30, according to a survey by Macroeconomic Advisers LLC, a St. Louis forecasting firm. That would be the fastest quarterly pace in almost four years. Macroeconomic Advisers estimates the economy grew 6.9%. However, most of the expansion in economic activity took place in July and August, when the effect of tax cuts and the mortgage-refinancing boom were strongest. There are signs consumer spending cooled in September as the impact of mortgage refinancing and tax cuts faded. The Conference Board said six of the 10 indicators in its index declined, led by the money supply, and the relationship between long-term and short-term interest rates. Positive contributors were the manufacturing workweek and stock prices. Economists see growth decelerating to a still-respectable 3.8% fourth-quarter rate, according to...

Posted by DeLong at 10:55 PM

October 19, 2003
There Is No Such Thing as Overinvestment! There Is Only Deficient Demand

Louis Uchitelle frames the issue the wrong way around: there is no such thing as "overinvestment," there is only too little aggregate demand. If you think that there is "overinvestment," dropping the interest rate will cure you of that belief. At least, it will until you hit a liquidity trap... But it looks like that is no longer a dangerous possibility. Overcapacity Stalls New Jobs: But another dynamic closer to home is weighing on job creation -- the slow process of working through a glut of boom-era investment that continues to litter the economy with underused factories. Procter & Gamble, for example, has been dumping its weakest brands and the plants that produce them. At its Ivorydale industrial complex here, in Procter's hometown, the company has sold factories that make Crisco shortening, Olean fat substitute and Ivory soap to three manufacturers, each with plans for squeezing efficiencies from the operations. Hiring more workers is the last item on their agendas. "As long as there is extra capacity available in manufacturing, there is going to be room to move work around among companies without having to add workers," said Thomas A. Kochan, a labor and management expert at the Sloan School...

Posted by DeLong at 11:38 AM

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 08:15 PM

October 14, 2003
More Good Economic News

More good economic news--although whether the good news is mostly about productivity, mostly about exports, or mostly about domestic investment spending is not clear: WSJ.com - Intel's Earnings Soar With PC Chip Demand: Intel Corp.'s recovery kicked into a higher gear in the third quarter, as the big chip maker reaped big benefits from the rise in mobile computing and strong demand in Asia. The Santa Clara, Calif., company said net income more than doubled in the period ended Sept. 27, on revenue that rose 20% from the year-earlier period and record unit shipments of its microprocessor chips. Intel also forecast another healthy jump in sales for the fourth period, as well as further improvement in its already formidable gross profit margin. "It was an outstanding quarter," said Andy Bryant, Intel's chief financial officer......

Posted by DeLong at 04:51 PM

The Federal Reserve Is Watching the Labor Market

Ben Bernanke tries to convince the markets that the Federal Reserve will not raise interest rates until the unemployment rate drops significantly: Fed's Bernanke commits to low interest rates - Oct. 14, 2003: WASHINGTON (Reuters) - The U.S. economy seems on track for a sustained period of expansion, but the Federal Reserve can keep interest rates low at least until signs emerge of a solid jobs market recovery, a top Fed official said Tuesday. "After several false starts, the economy is showing signs of sustained recovery," Fed Governor Ben Bernanke said in testimony prepared for delivery to the Senate Banking Committee. Still, Bernanke told the panel the Fed sees risks that already low inflation could drift lower, putting the central bank in a position to hold interest rates at a low level to foster a sustained recovery in the long-suffering U.S. jobs market. The panel was also to hear from Fed Vice Chairman Roger Ferguson, who has been tapped by President Bush for a fresh four-year term as the board's No. 2 official. In prepared remarks, Ferguson told the committee big technological advances had made the U.S. workforce more productive. "But faster productivity growth, despite its long-term benefits, has not...

Posted by DeLong at 09:31 AM

October 13, 2003
Around Every Silver Lining There Is a Dark Cloud

Stephen Roach thinks that we have already seen the fastest growth the U.S. economy will see for quite a while. He's very smart, and very thoughtful: Morgan Stanley: ...In the case of the US, a significant portion of the current growth spurt appears to have borrowed from the future. At least, that's the verdict that can be taken from what we estimate to have been close to a 25% annualized growth in durable goods consumption in the two middle quarters of 2003 -- the sharpest back-to-back quarterly gains in this category since the early 1970s. With consumer durables now having risen to what we estimate is a record 11.4% share of real GDP in 3Q03, nearly two full percentage points above the 9.5% portion prevailing at the onset of the last recession in early 2001, there's little reason to believe that the recent surge represents a recouping of long-deferred, or pent-up, demand. Instead, it was probably more of an artificial boost reflecting the impacts of the recent tax cut, aggressive vehicles sales incentives, and the lagged effects of yet another surge of home mortgage refinancing activity. Inasmuch as durables are long-lasting items that are purchased at infrequent intervals, I would...

Posted by DeLong at 08:23 AM

October 09, 2003
Updated Forecasts from the Wall Street Journal's Survey

Updated forecasts from the Wall Street Journal forecast. It is interesting that 100% of upward revisions in forecasts over the past two months has been in expected productivity growth, and none has been in expected employment growth: WSJ.com - Consumers Give a Boost To Economists' Forecasts: The average forecast of the 53 economists who participated in The Wall Street Journal Online's economic-forecasting survey this month put growth for the third quarter at an inflation-adjusted annualized rate of 5%, up from the 4.7% rate they predicted in a September survey and from 3.6% in August. But while economists have been walking third-quarter expectations higher, they have largely left unchanged forecasts that growth will moderate in the current quarter and the first half of 2004. For early next year, they put growth in gross domestic product, the broadest measure of output in the economy, at just under a 4% rate. That is still considerably stronger than what was seen early this year. Second-quarter growth was at a 3.3% rate, while first-quarter growth was at a 1.4% rate. Many economists attributed the strength in consumer spending to the latest federal-tax reductions. Some economists said they were caught off-guard by the extent of the...

Posted by DeLong at 07:49 PM

October 06, 2003
Continued Optimism

Morgan Stanley's Richard Berner and David Greenlaw continue to be optimistic about the U.S. business-cycle recovery over the next two years: Morgan Stanley: ...Moreover, many fear that sluggish growth will return once the impetus from the fiscal stimulus effective in July and mortgage refinancing fades.  Indeed, incoming signals have already turned mixed and fourth quarter demand growth likely will be weaker than the third, even with rising employment raising income prospects.  It was fun while it lasted, but in our view the adrenaline rush of the upswing in demand growth is over; now come strong but unspectacular gains in demand.  Yet a dip in August capital goods orders and shipments, a September decline in vehicle sales from hyper-elevated August levels, and softness in consumer sentiment and purchasing-manager surveys have all raised concerns that the deceleration might be long lasting.  We disagree.  To be sure, those hurdles will keep the sustainability debate alive.  But as we see it, a sustainable recovery remains the most likely outcome, as four factors assure that the demand side of the equation has more legs than commonly perceived.  First, pent-up demand for capital goods and hiring is rising as post-bubble headwinds are fading (see The Drivers...

Posted by DeLong at 08:07 PM

September 30, 2003

Bad news about consumer confidence: Consumer confidence drops below expectations - Sep. 30, 2003: Consumer confidence in the U.S. economy dropped in September, a research group said Tuesday, weighed down by nagging worries about a weak job market. The Conference Board, a business research group based in New York, said its closely watched index of consumer confidence fell to 76.8 from a revised 81.7 in August. Economists, on average, expected confidence to fall to 80.5, according to Briefing.com. In addition, the Conference Board's "expectations" index, which measures how consumers feel about the future, fell to 88.4 from a revised 94.9 in August. The "present situation" index dropped to 59.5 from a revised 62. "The lack of improvement in labor market conditions continues to dampen consumers' spirits," said Lynn Franco, director of the Conference Board's Consumer Research Center. "Despite September's retreat, consumers remain cautiously optimistic about the outlook for the next six months. Consumer spending is likely to continue at or near current levels."......

Posted by DeLong at 01:46 PM

September 27, 2003
Uhl and Gaz

OPEC flexes its muscles. I should redo the back-of-the-envelope calculations: what difference for the U.S. economy does it make if oil is $30 a barrel rather than $20 a barrel? Economist.com: BEFORE the regular meeting of the Organisation of Petroleum Exporting Countries (OPEC) in Vienna on Wednesday September 24th, most of the drama was provided by Hugo Chávez, the Venezuelan president, who opined that the Iraq representative should not have been at the get-together because he was an illegitimate stooge of American occupiers. If that is so, Ibrahim Bahr al-Uloum behaved very oddly. His bullish predictions that Iraq could produce at least 3.5m barrels per day (bpd) by 2005 seem to have been among the factors that persuaded the ten members of OPEC's quota system to approve a surprise production cut of 900,000 bpd, to 24.5m bpd. The effect of the cut was to send oil prices sharply higher. The futures price of West Texas Intermediate, the American benchmark, leapt by $1.06, to $28.18. Equities in America retreated on fears that a higher oil price could stymie the incipient economic recovery: the Dow Jones Industrial Average of 30 leading shares fell by 1.57% that day.... Some observers are also speculating...

Posted by DeLong at 05:20 PM

September 25, 2003
Bad News About Production

Bad news (but not very bad news) about production: WSJ.com - Orders in August For Durable Goods Decreased 0.9%: The Commerce Department reported that U.S. manufacturers saw a 0.9% decline in orders for August from July for long-lasting durable goods such as cars, computers and household appliances, to a seasonally adjusted level of $173.3 billion. That followed solid gains during the two preceding months......

Posted by DeLong at 09:03 PM

September 22, 2003
Ben Bernanke Sees Inflation Falling Still More

Bernanke's private inflation forecast: Fed's Bernanke sees drop in inflation - Sep. 22, 2003: Bernanke said, "The basic idea that inflation will remain tame and under control is a good message to take away, I don't really disagree with that. But what I'd like to point out is that there are some risks to the downside there, because in particular, even though the economy is growing pretty rapidly, there's a lot of slack still in the economy." "My forecast...is that inflation will actually fall even a little bit further from where it is today," he told a conference sponsored by the National Association of Federal Credit Unions......

Posted by DeLong at 09:54 AM

September 16, 2003
The Latest Industrial Production Number

It's not worth much because of the blackout, but here it is: Production Inches Higher, While Manufacturing Declines: Production at factories, mines and utilities increased 0.1 percent in August after rising 0.7 percent in July, more than previously stated, the Federal Reserve said. The report was aided by a 2.1 percent jump in computer equipment production, the biggest gain since July 2000. The results fell below the median forecast of a 0.3 percent gain in part because of a 0.1 percent decline in manufacturing, the first since April, after a blackout in the Northeast and Midwest crimped auto production, economists said. "I don't think this report undermines what we're seeing in terms of recovery for the rest of the economy," said Richard DeKaser, an economist at National City in Cleveland. "With inventories so low, there's a good case to be made for an uptick in production the rest of the year."...

Posted by DeLong at 10:36 AM

September 12, 2003
Lower-Than-Expected Retail Sales

A piece of not-so-good demand news, from John Labate of the Financial Times: FT.com Home US: Expectations of a strong rebound in the US economy were called into question on Friday with disappointing reports on retail sales and consumer attitudes. US retail sales rose in August, but more slowly than expected. Sales by retailers reached $319.2bn (euro 290bn, £200bn), a rise of 0.6 per cent from the previous month and 5.4 per cent from August 2002, according to the US Commerce Department. The top-line sales figure, however, was only about half of what economists had been expecting. The second surprise came with a report suggesting that consumer sentiment had edged lower in early September from August levels. The consumer sentiment index compiled by the University of Michigan fell in its preliminary September reading to 88.2, down from the final reading for August of 89.3. Economists had expected September to be above 90. The Michigan report's measure of current views on the economy and future expectations also dropped from August levels.... Analysts said the dip in consumer sentiment reflected concerns about the sluggish employment sector. Economists asked how strong consumer spending might remain in the months ahead, if the employment sector...

Posted by DeLong at 09:08 PM

September 03, 2003
Econ 101b: Fall 2003: The Erosion of Okun's Law

We used to have considerable confidence in Okun's law: that an extra one percentage point rise (or fall) in the unemployment rate over a year would reduce (or boost) that real GDP growth by an extra 2.5 percent over that year because a rising (or falling) unemployment rate would also be accompanied by a falling (rising) share of the population in the labor force and by falling (rapidly rising) productivity. Productivity would fall when the unemployment rate rose for two reasons: first, even when factories are not running at full capacity they still incur substantial setup and maintenance costs; second, even when there isn't enough work for them to do firms would rather hold onto skilled workers than watch them drift away and have to pay to train their replacements the next time the wheel of the business cycle turns. Things have been different, however, in this recession (and to a lesser extent in the preceding early-1990s recession. The standard relationship between output growth and hours worked has gone substantially awry. See that branch poking out of the scatter diagram on the left side? That's the most recent data. (The smaller twig pointing out below and to the left...

Posted by DeLong at 04:22 PM

September 02, 2003
Labor Market Forecast

A labor market forecast from briefing.com: WSJ.com -- Reports from Briefing.com: The labor market remains in transition as the last six months of payroll declines are expected to turn into small gains over the coming months.  The dismal news from manufacturing continues with a 36th consecutive month of decline summing to 2.8 mln fewer workers.  Private service sector payrolls have been bouncing on either side of flat growth.  The monthly movement is volatile due to corporate cost cutting, strong labor productivity and an economy that's not generating a strong lift in aggregate demand.  The lagging unemployment rate reached a new 6.4% high in June and will continue to follow a path higher even as payrolls return to growth.  Hourly earnings are running at a 3% pace as compensation costs are of lesser concern given weak unit labor costs (compensation offset by productivity gains).  The workweek is a key indicator of labor demand and a leading indicator of payroll growth but shows no evidence of an impending upturn.  The labor market still shows no signs of tightening up but it lags the overall economy....

Posted by DeLong at 09:21 PM

September 01, 2003
Another Piece of Good Business-Cycle News

Still more good news on the global investment demand front: Forbes.com: Global chip sales up 2.9 pct M/M in July - WSTS: AMSTERDAM, Sept 1 (Reuters) - Global semiconductor sales were $12.905 billion in July, rising 2.9 percent from the previous month and 10.5 percent versus July 2002, a global industry group said on Monday. Sales in Japan jumped 4.8 percent from June, while sales in Asia Pacific were up 2.9 percent. In Europe they rose 2.3 percent and in Americas by one percent from June, the World Semiconductor Trade Statistics (WSTS) group said....

Posted by DeLong at 12:02 PM

August 31, 2003
Third Quarter Growth Forecasts

Andrea Hopkins of Forbes writes about expectations for faster U.S. growth: Forbes.com: U.S. recovery is here -- we mean it this time: ...Often burned but never shy, economic forecasters have ramped up predictions for growth for the rest of 2003 and into 2004, certain -- once again -- that America has turned the corner on the 2001 recession. "All the data's saying the same thing: this quarter is going to be a cracker," said Ram Bhagavatula, chief economist at Royal Bank of Scotland Financial Markets, predicting gross domestic product growth will hit a 6 percent to 7 percent annual rate this quarter. He's not alone. A raft of positive economic news in recent weeks has many economists hiking third-quarter growth forecasts as high as 7 percent -- more than double the 3.1 percent annual growth rate notched in the second quarter... And this leaves me looking at the labor market and scratching my head: if workers are becoming so much more productive so fast, why aren't firms hiring more of them. I have no special reason to doubt either the output or the work hours figures, but this business-cycle configuration is very, very unusual indeed......

Posted by DeLong at 10:04 PM

August 29, 2003
Comment on Stock and Watson

Comment on James Stock and Mark Watson (2003), "Has the Business Cycle Changed?" (Forthcoming in the 2004 Monetary Policy and Uncertainty: Adapting to a Changing Economy (Kansas City: Federal Reserve Bank of Kansas City). James Stock and Mark Watson's paper challenges things that I thought I knew, and tells me that I am going to have to rethink a bunch of issues--going to have to mark my beliefs to market once again. To the extent that there has been a conventional wisdom among economic historians, the extraordinary moderation of the business cycle--the reduction in the size of swings in the unemployment rate, and in the variance of annual output growth--has been due to very important learning about how to better conduct monetary policy. Christina Romer has been the most powerful advocate of this line of narrative. And this has been what I have taught my students over the past several years. The founding of the Federal Reserve brought the possibility of an elastic currency, and of avoiding the great liquidity catastrophes that afflicted the U.S. in the late nineteenth century. The silver-agitation crises of the 1890s, the great crash of 1873 when British investors grew nervous about the "crony capitalism"...

Posted by DeLong at 05:55 PM

August 26, 2003
And More Good News

Good news about consumer confidence as well: WSJ.com - Consumer Confidence Bounced Back in August: The Conference Board reported Tuesday that its consumer-confidence index rose to 81.3 in August from a revised 77 in July. The expectations index jumped to 94.4 from 86.3, while the index measuring attitudes on present conditions slipped to 61.6 from 63. Labor-market concerns continued to dominate. The share of consumers who found jobs "plentiful" inched up to 11.1% from 10.7%, but there was a far larger increase in those who said jobs were "hard to get" -- to 34.1% from 32.7%. In terms of expectations six months from now, 18% expected more jobs, up from 16.6%, while 18.6% expected fewer jobs down from 19.6%......

Posted by DeLong at 07:40 AM

More Good Business Cycle News

Good news this morning about spending on durables: New orders for durable goods in July were $174 billion, up 1.0% from June. Shipments were $181.4 billion, up 2.6% from June. And inventories were $263.9 billion, down 0.9% from last month......

Posted by DeLong at 07:34 AM

August 22, 2003
More Good News About the Third Quarter

Real investment in high-tech equipment has been running at a world-record pace for several quarters now. But what's different about this piece of good news is that demand is finally strong enough for capital-equipment producers like Intel to actually make some money: WSJ.com - Chip Maker Intel Raises Outlook for Sales, Margins: Intel Corp. raised its outlook for the third quarter, citing strength in its personal-computer microprocessor business, and said its profit margins will be better than previously forecast. In early trading Friday, shares of Intel were up $2.08, or 7.9%, to $28.47 on the Nasdaq Stock Market. Speaking in a conference call, Chief Financial Officer Andy Bryant said the company raised its revenue targets after experiencing higher-than-expected microprocessor shipments in July and the first couple of weeks of August. He said that microprocessors, chipsets and motherboards are "unexpectedly strong" across all geographic regions and channels. He noted that customer inventories remain lean, signaling that customers' products are also selling well. Intel felt that this change was "big enough" that it had to tell investors about it, he said. Intel made its announcement two weeks ahead of its regularly scheduled midquarter update, which is slated for Sept. 4......

Posted by DeLong at 08:55 AM

August 18, 2003
By Contrast, Morgan Stanley Is More Than Bullish...

By contrast, Morgan Stanley is more than bullish on America. It is positively aurochish on the likely rate of economic growth in the current quarter. Let me give the mike to Richard Berner: Morgan Stanley: ...There's no mistaking the gathering momentum in U.S. economic activity, however.  Incoming data depict a rapidly accelerating economy: From just 1.4% in Q1, it now appears that growth could touch 5% in the current quarter.  And the strength is broadly-based, suggesting genuine staying power.  Upside surprises in both consumer and business capital spending have paced the improvement in demand.  Responding to tax cuts and the ongoing benefits from lower debt service costs, consumers stepped up spending sufficiently on vehicles and a variety of soft and hard goods in July so that even modest gains in August and September would likely yield a 4½% real pace in the third quarter.  Fuelled by rising profitability, a broad-based replacement cycle, and stepped-up tax incentives for investment, businesses appear to be committing to increased capital spending.  While third-quarter data aren't yet available, sharp June gains in shipments and, more important, in advance bookings, hint at real gains in the high single digits... A 5% annual real GDP growth rate...

Posted by DeLong at 10:47 AM

Merrill Lynch May Be Bullish on America, But...

Corporate insiders appear to be selling, not buying, their companies' stock. At the very least, this tells us that insiders do not think the stock of companies they manage is a particularly good investment. WSJ.com - Insiders' Moves in Face Of Rally Spark Concern: The economy and the stock market may be perking up, but the nation's corporate executives aren't yet buying into the recovery. In fact, they are selling their company's stock at levels not seen in more than a year -- a potentially ominous sign for the market in the months ahead. Common Wall Street wisdom, and recent history, hold that the sentiment of company insiders when it comes to their own stock is an unusually accurate indicator of future market performance. Executives, after all, are among the best-informed investors when it comes to their companies, giving their buying and selling significant predictive value. Their recent predictions aren't very encouraging. According to Thomson Financial, the dollar ratio of insider transactions in July was $32.21 in sales for every $1 in purchases, the highest monthly reading since May 2001. July marked the third consecutive month the ratio topped 20 to 1, a bearish level that hasn't been sustained for...

Posted by DeLong at 07:52 AM

August 15, 2003
Good Industrial Production News for July

A surprisingly large jump in industrial production in July--especially considering that manufacturing employment fell by half a percent, by 71,000 in July: from 14.68 to 14.61 million: FT.com Home US: US industrial production rose at its fastest pace since January last month, adding to the evidence that economic growth is accelerating. Output rose by a robust 0.5 per cent over the month, its third consecutive gain and well ahead of expectations of a 0.2 per cent rise. The figure was boosted by a steep rise in utility output - which economists said reflected the greater use of air conditioning - and strong car sales, which have been helped by a new round of incentives. But the rise in output was relatively broad-based, with a particularly strong 4.2 per cent rise in home electronics... "This will increase confidence that we have a recovery on our hands," said Mark Cliffe, chief economist at ING. "There is now a fighting chance of getting growth of above 4 per cent by the end of the year." It's only one month, and manufacturing is not the same thing as industrial production, but it's interesting to see industrial production rising at a 6% per year rate...

Posted by DeLong at 09:26 PM

Little Fear of Accelerating Inflation in Europe

More bad news about the pace of economic growth in the euro zone. It leaves me, once more, scratching my head and trying to figure out what the ECB thinks that it is doing. WSJ.com - German Economy Shrank 0.1% In Quarter, Confirming Recession: FRANKFURT -- The euro zone, collectively the world's second-largest economy, stagnated during the second quarter, highlighting its relative weakness against the U.S. and even perennial laggard Japan. Although economists say the worst may be over, several major European nations -- Germany, Italy and the Netherlands -- saw their economies shrink, the European Union's statistics agency said. For Germany, it was the third straight quarter of contraction; Europe's largest economy is in its second recession in two years......

Posted by DeLong at 03:55 PM

Output and Hours Since 1960

Some more two-year centered moving averages since 1960: this time it's nonfarm business real output and nonfarm business total hours worked. Once again (and unsurprisingly) we are outside the bounds of previous experience in the modern American economy: The little twig on the left side of the figure shows the moving-average data for 2000-2002. Never in any two-year period in the modern American economy's experience have hours fallen so fast. Given what has happened to hours in the recent past, the standard historical pattern would lead you to expect output to be falling at 2.5% per year or more--and you would expect productivity growth to be negative, not positive and in excess of 4% per year. We are indeed in uncharted waters. Not that we should mind--extraordinarily rapid productivity growth is a wonderful gift. But it does pose different problems for economic management to solve than the ones we had gotten used to......

Posted by DeLong at 10:43 AM

More Good GDP (and Productivity) News About the Second Quarter

News about the economy in the spring released since the initial estimate of second-quarter GDP growth tells us that the second-quarter growth rate is likely to be revised upward significantly--from a 2.4% annual growth rate to perhaps a 3.0% annual growth rate. This is excellent news for production and productivity: Forbes.com: Analysts see U.S. 2nd quarter GDP upward revision: Merchandise trade data out on Thursday showed exports rose a healthy 2.4 percent in June, while in real terms, which is what matters for gross domestic product, the trade deficit narrowed sharply to $47.23 billion from $50.04 billion in May. The [trade] deficit was much smaller than that assumed by statisticians in the advance measure of GDP released on July 31, suggesting trade subtracted less from growth than the 1.56 percentage points initially estimated. The trade news comes hot on the heels of significant upward revisions to retail sales figures for both May and June. On Wednesday the Commerce Department unexpectedly upped its June estimate of sales to a rise of 0.9 percent from 0.5 percent, while May now shows a gain of 0.5 percent when it was flat before. The sudden discovery that consumers spent a lot more than first...

Posted by DeLong at 09:54 AM

August 12, 2003
Scorn for President Bush

The Economist explains the currently-limited power of monetary policy: Economist.com: Of course, what the Fed manages to convey about what it will do in the future is as important as what it does or does not do in the present. The FOMC has its hands on only the shortest of short-term interest rates--the overnight rate at which banks can borrow federal funds. Trimming a quarter point one way, or tacking a quarter point the other, is not in itself enough to steer America's huge economy. If the Fed wants to reduce the longer-term rates that really matter, it must not only get short-term rates down, as it has done, but it must also signal to the market that they will stay down. If the bond markets read and believe the Fed's signals, short rates will feed through into long rates almost immediately. That way, as Michael Woodford, a Princeton economist, puts it, the Fed can get the bond market to do its work for it. But the bond market can also work against it, as it has done over the past month. Since mid-June, the yield on the ten-year Treasury bond has risen by almost 40%. The futures market was...

Posted by DeLong at 07:28 PM

The Tip of the Whip That Is the Business Cycle

Spending on services is acyclical--it does not change over the business cycle. Spending on goods does change: it falls in recessions, and rises rapidly during expansion. Spending on durable goods is even more cyclical: you can postpone purchases of durables when cash is tight during a downturn, and accelerate durables purchases when cash is plentiful. Spending on capital goods to make durable goods is even more of a business-cycle roller coaster: businesses will buy the capital goods needed to make durables only when they find that high demand for the durable goods they make has brought them to the limit of their capacity. And the most cyclically-sensitive sectors of all--the tip of the whip that is the business cycle--make the equipment needed to make the capital goods that firms purchase in order to produce durable goods. One firm in particular--Applied Materials--is the preeminent manufacturer of the equipment needed to make high-tech capital goods. And so today investing in Applied Materials is, as the Financial Times writes, a clean and highly leveraged bet on the strength of America's current anemic business-cycle recovery--a bet only for those with "iron nerves": FT.com Home US: For a leveraged bet on the tech rebound, they...

Posted by DeLong at 08:24 AM

August 11, 2003
Some Optimism in the Forecasts

Forecasters are beginning to expect that higher corporate profits will lead to more investment spending. Unfortunately, forecasters seem to see no declines in the unemployment rate until next summer... WSJ.com - Spending by Corporations May Give Economy a Jolt: Though wary from rallies that never materialized and economic bright spots that quickly faded, economists are beginning to feel more confident: They have raised expectations for third-quarter growth, and say a rebound in corporate profits should prompt companies to finally boost capital spending and investment. "All through the downturn I've felt that all that we have seen are false starts. But for the first time, I have to say, I think we're headed into the real thing," said Allen Sinai, chief global economist at Decision Economics in New York. The average forecast of the 54 economists who participated in The Wall Street Journal Online's economic survey this month put growth for the current quarter at an inflation-adjusted annualized rate of 3.6%, up from the 3.5% average forecast in a survey conducted in June. Expectations for an acceleration in growth late this year and early next year were unchanged. In the second quarter, gross domestic product -- the broadest measure of economic...

Posted by DeLong at 07:49 AM

August 09, 2003
Productivity Growth Trends

The Economist focuses on this past quarter's productivity growth number, without taking a look at the larger picture: Economist.com: Output has dipped and climbed, but has the trend rate of growth risen? Economists are still far from a consensus.... When the productivity figures did pick up in the second half of the 1990s, all of the assorted gurus, bulls and nerds claimed vindication. Even Mr Greenspan became a cheerleader for the new economy, albeit a rather taciturn and oblique one. The cheers faded as the stockmarket bubble burst and the economy went into recession. But the collapse in share prices does not itself disprove the notion of a new economy. The bears can be right without the nerds being wrong, because technological revolutions do not always pay off for the people who bought stocks in them. The railroad investors of the late 19th century, for example, made no money from their stakes in America's rail companies, but most agree that the economy as a whole benefited. Productivity gains can be real, without showing up in your dividend payments. The gains might go to workers, in the form of higher wages, or they might show up in the creation of new...

Posted by DeLong at 08:48 PM

July 31, 2003

From the New York Times: Faster 2nd-Quarter Growth Fuels Optimism: The United States economy threw off its sluggish growth in the second quarter and expanded at a 2.4 percent annual rate, pulled up by rising military and consumer spending and, at long last, a revival in business investment in computers and software, the government reported yesterday. The spring upturn has nearly every forecaster, even the pessimists among them, signing on to the proposition that the national economy is finally breaking out of the weak, jobless recovery that has lasted for 18 months... Huh? The spring upturn in production was a nice positive surprise. But it was not not the end of the "jobless recovery": hours worked by Americans shrank at a 1.6% per year rate in the second quarter. The spring upturn was a positive surprise not because output growth pulled employment up, but because fast productivity growth allowed the American economy to satisfy stronger demand even with the putrid labor-market performance of the spring....

Posted by DeLong at 09:16 PM

Yes! Good GDP News!

Yes! The second quarter (April-June) showed significantly faster real GDP growth than I (and everybody else) had been expecting: GDP grew at a 2.4% per year annual rate (meaning that second-quarter real GDP was 2.4%/4 = 0.6% higher than first-quarter real GDP. Now IIRC, average hours worked were down 0.2% in the second quarter vis-a-vis the first quarter, and employment was down in the second quarter by 0.2%, meaning that Americans worked 0.4% fewer hours in the second quarter than the first quarter--that labor input shrank at a 1.6% per year annual rate. Combine a 2.4% per year rate of growth of real GDP with a -1.6% per year rate of growth of labor hours, and you have a 4.0% per year rate of growth of labor productivity. That's a very impressive number for the long run. But in the short run it drives a big wedge between the (relatively good) production news and the (relatively bad) employment news. GDP growth accelerates in 2Q - Jul. 31, 2003: Gross domestic product (GDP), the broadest measure of economic activity, grew at a 2.4 percent annual rate in the quarter after growing at a sluggish 1.4 percent rate in the first quarter,...

Posted by DeLong at 11:46 AM

July 30, 2003
Divergent Expectations

MSN's Jim Jubak worries about the striking divergence between the (relatively pessimistic) expectations of consumers and the (relatively optimistic) expectations of Wall Street analysts. He seems to come down on the side of consumers: he thinks that the confirming numbers one would expect to see if analysts' forecasts of a strong second-half recovery were coming true are hard to find: MSN Money - Jubak's Journal: ...So why such different reads on the future from consumers on Main Street and analysts on Wall Street? The conventional explanation is that consumers are pessimistic because their emotions are so heavily influenced by the continued high level of unemployment.... Wall Street tends to dismiss the jobs worry. Unemployment is a lagging indicator.... But that explanation sells consumers short. Looking around, consumers can see that companies are still in the last stages of announced cost-cutting and the next six months will bring additional layoffs. Wall Street analysts have their own data problem. There's nothing in second-quarter results or company guidance for the third quarter that shows the long-anticipated second-half recovery will arrive on schedule.... Look at the technology sector. Earnings per share gains of 21% in the second quarter have come on revenue gains of...

Posted by DeLong at 10:03 PM

July 29, 2003

Bad news this morning about the U.S. business cycle: Consumer confidence plunges - Jul. 29, 2003: The Conference Board, a business research group based in New York, said Tuesday that its closely watched index of consumer confidence fell to 76.6 from 83.5 in June. Economists, on average, expected confidence to rise to 85, according to a Reuters poll. The Conference Board's "expectations" index, which measures how consumers feel about the future, fell to 86.4 from 96.4 in June. The "present situation" index dropped to 61.9 from 64.2. "The rising level of unemployment and sentiment that a turnaround in labor market conditions is not around the corner have contributed to deflating consumers' spirits this month," Lynn Franco, director of the Conference Board's Consumer Research Center, said. "Expectations are likely to remain weak until the job market becomes more favorable."... Yeah. And the job market will not become more favorable until after expectations become strong. This is disappointing....

Posted by DeLong at 09:30 AM

July 27, 2003
More Good Business-Cycle News

Well. It's starting to look good--as if we may finally get a healthy recovery, in production at least: Forbes.com: WRAPUP 2-U.S. June factory orders, new-home sales up: WASHINGTON (Reuters) - Orders for costly U.S. manufactured goods shot up in June at the fastest rate in five months while sales of new homes hit a record, reports showed Friday, boosting optimism the recovery is gaining speed. The surprisingly strong signs of economic revival gave investors a jolt of energy that sent stock prices higher, but some analysts cautioned it will take some time to gauge whether a quicker economic pace has taken hold. A housing industry group suggested the recent uptick in long-term interest rates may be casting some gloom on the hot sector. In addition, economists noted the durable goods report is often volatile and subject to sharp revision, especially with many factories shutting down for retooling in July. The Commerce Department said orders for durable goods -- items like cars and refrigerators designed to last three years or more -- climbed 2.1 percent to a seasonally adjusted $172.5 billion last month after being flat in May......

Posted by DeLong at 10:31 AM

July 20, 2003

Richard Berner of Morgan Stanley sounds very bullish on the American economy: Morgan Stanley: ...There are encouraging signs for our recovery call.  Consumer demand is improving, and with relatively lean inventories, production has begun to play catch-up.  As a result, some improvement in growth from the tepid 1.5% pace of the past nine months seems to be in train.  Make no mistake, however; it is too soon to proclaim an acceleration to 4%-plus growth.  That's still only a forecast, and key risks remain.  Among them: Labor markets are still soft, as companies are reluctant to hire.  Global growth is weak, and there is no obvious non-U.S. engine of growth.  And energy prices are still high, with crude quotes well over $30/bbl and gasoline prices edging back up in July.  Even these risks, however, may be abating.  Are the signs of recovery sustainable? And will the evidence of peaking risks continue?  Yes, in both cases, in my view.  Here's why. First, let's quickly review the analytics.  Five factors lie behind our call for stronger growth: Post-bubble headwinds are fading; for example, in the ratio of capital spending to depreciation, I see some signs of building pent-up demand (see "Higher Rates Will...

Posted by DeLong at 02:08 PM

July 17, 2003
Dating the Business Cycle

The NBER's Business Cycle Dating Committee has decided that the last business-cycle trough took place in November of 2001. More interesting, they seem to have dropped employment from their list of principal monthly indicators. Their report puts income first, industrial production and sales second, and refers to Macroeconomic Associates's estimates of monthly GDP: Release: For these reasons, the committee refers to a variety of monthly indicators to choose the exact months of peaks and troughs. It places particular emphasis on real personal income excluding transfers and on employment, since both measures reflect activity across the entire economy. The committee places less emphasis on the industrial production and real sales series, which mainly cover the manufacturing and goods-producing sectors of the economy. The committee also looks at estimates of monthly real GDP prepared by Macroeconomic Advisers. There is no fixed rule about what weights are assigned to the various indicators, or about what other measures contribute information to the process... IIRC, it used to be that employment, incomes, sales, and industrial production were more-or-less all given equal weight. It also used to be that those four series tended to have peaks and troughs that were very tightly clustered together. It is...

Posted by DeLong at 09:39 AM

Mankiw vs. Greenspan

Greg Mankiw: Deficits And Economic Priorities (washingtonpost.com): The administration's budget update, released yesterday, shows the economic recovery is picking up steam. It also shows a budget deficit for 2004 of $475 billion.... [U]nder the president's proposals, the deficit will shrink from 4.2 percent of gross domestic product in 2004 to 1.7 percent in 2008. The key to achieving this is more-rapid economic growth, which will bring in more tax revenue, together with restraint in the growth of government spending. Because the deficit is shrinking, the accumulated level of national debt is not expected to become problematic... Alan Greenspan: Greenspan Sees Danger In Deficits (washingtonpost.com): Federal Reserve Chairman Alan Greenspan warned yesterday that continuing large federal budget deficits eventually would cause long-term interest rates to rise and damage U.S. economic growth. "There is no question that if you run substantial and excessive deficits over time, you are draining savings from the private sector, and other things equal, you do clearly undercut the growth rate of the economy," Greenspan told the Senate Banking Committee. On Tuesday, the Bush administration forecast that the deficit will reach $455 billion in fiscal 2003... [a]s economic growth improves and the nation nears full employment, the deficit...

Posted by DeLong at 09:30 AM

July 15, 2003
Greenspan Before the House Financial Services Committee

Greenspan made two points that I did not really expect. The first is the Federal Reserve's new position that it still has "substantial" room to cut short-term interest rates, even though the target Federal Funds rate is now a low 1% per year. The second is that the Federal Reserve thinks that the accounting scandals have played a significant role in discouraging investment--in which case the failure of the Bush administration to take action and the great Harvey Pitt follies have been very expensive for the American economy. Greenspan: Further interest rate cuts possible - Jul. 15, 2003: NEW YORK (CNN/Money) - The Federal Reserve could make further substantial cuts in interest rates, Alan Greenspan told Congress Tuesday, but the central bank chairman also said the Fed was not ready to take unusual steps such as buying Treasury bonds to give a lift to the economy. "With the target funds rate at 1 percent, substantial further conventional easings could be implemented if (Fed policy makers) judged such policy actions warranted," Greenspan said in remarks to the House Financial Services Committee. Greenspan also said the Fed, the nation's central bank, was ready to keep rates low for a "considerable" period of...

Posted by DeLong at 10:08 AM

July 12, 2003
When Will the NBER Call the End of the Recession?

The Washington Post's John Berry gives a very interesting look: his take on the back-and-forth within the NBER's Business Cycle Dating Committee. As Berry interprets it, the NBER is moving away from its old methodology ("We use the common pattern shown by cyclical indicators to gauge the state of the business cycle. What are cyclical indicators? Cyclical indicators are those that are useful in gauging the state of the business cycle.") to one that will ultimately conclude that a recession is a six-month decline in estimates of seasonally-adjusted monthly real GDP. I would prefer a shift to a three-part classification: recession, expansion, and employment stagnation. But I'm not on the NBER BCDC. washingtonpost.com: Number Crunchers vs. Recession: The arbiter of when U.S. economic recessions begin and end, the Business Cycle Dating Committee of the National Bureau of Economic Research, has laid the groundwork for calling an official end to the slump that began in March 2001.It could be weeks or months before that happens, but the committee has found a way around the fact that its key monthly indicator, payroll employment, has continued to decline long after the economy resumed growing.The committee designated March 2001 as the beginning of the...

Posted by DeLong at 09:56 AM

July 10, 2003
David Wessel Wonders When the Recovery Will Begin

David Wessel wonders when the real recovery will begin--when real GDP will begin to grow at the 3.5% per year pace that we think is needed to keep the unemployment rate from rising, or the 4.0% per year pace that we think is necessary if unemployment is to start to decline (and even then only slowly: by perhaps 0.2 percentage points per year). Forecasters tell him that the real recovery should begin very soon--but they said the same thing six months ago, and six months before that as well. More disturbing is the fact that it is not at all clear where any extra boost to the economy could come, should one turn out to be needed. The Federal Reserve is out of gunpowder. More aggressive fiscal policy--bigger short-run deficits--would be possible, but neither the president nor the congressional majority has shown any inclination at all to think seriously about how to try to use spending and tax policy to boost employment and growth in the next year or so. If neither monetary nor fiscal policy can be of use, the only remaining policy lever is to try to boost exports by talking the dollar down--a very difficult, hazardous, and...

Posted by DeLong at 12:21 AM

July 07, 2003
Reply Hazy, Ask Again

Morgan Stanley forecasts that the economy will either "muddle through or gain steam." I don't, however, understand their expectation of a radically different tone to the labor market in a few months--remember, at the average post-1995 labor productivity growth rate, we need about 3.6% per year real GDP growth just to keep the unemployment rate from rising. Morgan Stanley: ...Thus, it's far from catastrophic that convincing evidence is so far lacking for a meaningful economic acceleration.  But it does speak to the fact that consumers and businesses remain cautious.  Courtesy of declining energy prices, consumers clearly stepped up their spending pace in the last few months; real outlays rose at a smart 4.4% annualized clip in the three months ending in May, compared with a 2% rate in the first quarter.  But their appraisal of current economic conditions has essentially been unchanged for the past nine months, hinting that the faster pace isn't sustainable without improvement in fundamentals, namely income and jobs. And that's our key worry: Business hiring caution has kept the recovery jobless, with the current experience marking the worst employment performance of any postwar recovery.  We expect a dramatically different tone to labor markets soon, as the...

Posted by DeLong at 10:42 AM

The Economist Sees Bad News on the Supply Side

As if the world economy needed another factor adding drag... Economist.com: MANY of those who advocated war in Iraq argued that it would be a relatively cheap exercise. After all, Iraq sits on the world’s second-biggest oil reserves after Saudi Arabia; even before the war, the country was thought to have a production capacity of 3m barrels per day (bpd). All the conquering coalition troops would have to do is fix up the creaking or damaged oil wells and refineries, and Iraq would soon start paying for itself. Unfortunately, things haven’t turned out that way. Thanks to some astute forward planning (and the advance deployment of special forces), there was very little wartime damage to Iraq's oil fields. Since the war, though, disgruntled supporters of Saddam Hussein have sabotaged oil fields and pipelines. So Iraq has yet to export any oil produced since the war, a state of affairs that has buoyed the oil price. Now a general strike in Nigeria, triggered by a jump in the cost of petrol, threatens that country’s 2m bpd output. Some oil experts now think the oil price, currently bobbing around the $30 mark, could climb as high as $35 if the strike, already...

Posted by DeLong at 10:19 AM

July 03, 2003
Economic Growth Forecasts

The Wall Street Journal's stable of forecasters is looking for a strong rebound in economic growth after the most recent three bad quarters. WSJ.com - Economists Forecast A Second-Half Rebound: ...Last year at this time, for example, after the magnitude of the accounting scandals had already become clear, the consensus was still predicting a return to growth rates of about 3.5%. Instead, the economy grew at a 1.4% annual rate in the fourth quarter of 2002, and repeated that performance in the first quarter of this year. The second-quarter growth rate is believed to have been close to the same tepid level. The Commerce Department will report preliminary second-quarter growth later this month. These are the perils of predicting the future. Even the Federal Reserve has had its share of missed forecasts in recent years. In 2001, for example, Fed economists predicted the economy would grow by a little more than 2% and the unemployment rate would drift up to 4.5%. Instead it grew by 0.3% and the unemployment rate shot up to 5.8%. And last year at this time, the Fed was also predicting growth rates in excess of 3.5% by now. What is so alluring about the 3.5%...

Posted by DeLong at 08:19 PM

July 01, 2003
Historical Revisionism

John F. Irons is really annoyed that George W. Bush is trying to backdate the start of the recession to 2000. Of course, the real thing to get annoyed about is that the Bush Administration has done so very, very little to fight the recession: This isn't to say that Bush somehow caused the initial recession (although it certainly didn't help that VP Cheney was running around in the country in late 2000 and early 2001 telling everyone how the economy was in bad shape.)... The important question is not whose fault is the recession, but rather what has been the response of the administration to the economic situation. We have seen 3 major tax cuts... each of which were sold as economic and job stimulus, but which in reality had very little to do with good counter-cyclical fiscal policy, or with the current economic problems. The result? Unemployment continued to increase and is up to 6.1%, and there have been 2.5 million jobs lost since March 2001... As I've said before, the failure of the Bush Administration to take any significant steps to boost aggregate demand over the past two years is remarkable and strange. The most they've done...

Posted by DeLong at 12:51 PM

June 25, 2003
A Disappointment

A surprising disappointment: Durable goods orders down 0.3% in May - Jun. 25, 2003: U.S. durable goods orders sank 0.3 percent last month -- in contrast to the expectations of private economists that they would rise 0.8 percent. The data from the Commerce Department showed April orders plunged 2.4 percent, revised down from an earlier reported 2.3 percent drop. The report showed broad-based weakness in demand for big-ticket items, with categories such as cars, computers and machinery showing declines. Excluding the volatile transportation sector, orders edged up 0.2 percent, a much weaker showing than the 1 percent gain projected by economists in a Reuters survey......

Posted by DeLong at 07:20 AM

June 23, 2003
It Depends on What a Recession Is

The NBER's Business Cycle Dating Committee continues to hesitate. But it is not the case that more time will make the state of the U.S. economy between the start of 2002 and today clearer. The state of the U.S. economy is clear: slow growth in demand and output accompanied by rapid underlying productivity growth and so declining employment. What is unclear is what the NBER thinks a "recession" is. More time may be needed, but not because more time would shed better light on the state of the economy--rather, more time seems to be needed for the Business Cycle Dating Committee to think through what its system of categories really is. The NBER's Recession Dating Procedure: According to the most recent data, the U.S. economy continues to experience growth in income and output but employment continues to decline. Because of the divergent behavior of various indicators, the NBER's Business Cycle Dating Committee believes that additional time is needed before interpreting the movements of the economy over the past two years......

Posted by DeLong at 10:35 AM

June 21, 2003
Forthcoming Federal Reserve Rate Cut

The Washington Post's John Berry puts his ear to the ground and guesses that the Federal Reserve will cut interest rates next week by 0.50 percentage points (a 60% chance) or by 0.25 percentage points (a 40% chance). That seems about right to me--but his sources are much, much better than mine. One bone to pick, however. John Berry says that economists were "surprise[d]" by the fact that "recovery has been halting and 'jobless' despite huge doses of monetary and fiscal stimulus." This economist hasn't been surprised. Simply look at the late-1990s boom and the structural sources of the acceleration in productivity growth, and a "jobless recovery" looked like a definite possibility. Rate Cut Looking Like a Sure Thing (washingtonpost.com): ...Federal Reserve officials, concerned there is still no sign of the solid pickup in U.S. economic growth needed to foreclose the possibility of deflation, appear certain to cut their target for overnight interest rates next week. There is broad agreement among investors and analysts that a rate cut is coming, but there is disagreement about whether policymakers will lower their 1.25 percent target by a quarter-percentage point or by a half-point. The latter seems to be more likely as a...

Posted by DeLong at 06:48 AM

June 12, 2003
Make That, "The Glass Is Only 1/8 Full"

Europe teeters on the edge of recession... FT.com Home US: The European Central Bank on Thursday halved its growth forecast for the eurozone this year to just 0.7 per cent from 1.6 per cent, raising market expectations of further interest rate cuts in the months ahead. The bank, which also cut its forecast for growth next year to 1.6 per cent from its earlier projection of 2.4 per cent, made in December, said the revisions were prompted by the rapid appreciation of the euro. Inflation was projected at 2.0 per cent this year, slightly above earlier estimates, but was forecast to fall swiftly next year to 1.3 per cent, well short of the bank's close to but below 2 per cent price stability target......

Posted by DeLong at 11:16 AM

Make That, "The Glass Is at Most 1/4 Full"

The post-Iraq War bounce-back continues to be missing in the dataflow: FT.com Home US: US retail sales were flat in May and the number of new requests for jobless benefits remained high last week - signs that the economy continues to show little growth. The Commerce Department said retail sales rose only 0.1 per cent in May after a 0.3 per cent decline in April. The results were somewhat depressed by a drops in cas and gas sales. Excluding those declines, sales were up 0.6 per cent after a 0.4 per cent decline in April. All figures are seasonally adjusted. Seperately, the Labor Department said first-time unemployment insurance claims fell by 17,000 to 430,000 last week - but that result remains well above the 400,000 level most economists associate with a shrinking job market. The four-week moving average, a smoother gauge, rose to 433,750 from 431,500......

Posted by DeLong at 11:11 AM

A Glass That Is One-Third Full

The Federal Reserve's "beige book" finds that the postwar business cycle-recovery glass is not half full. But there is water in it... Yahoo! News - Fed Says Economy May Be Near a Rebound : ... The central bank said that four of its 12 districts -- Dallas, Kansas City, New York and Minneapolis -- detected signs of increased economic activity and no district reported further deterioration since the last report in late April. "The unwinding of war-related concerns appears to have provided some lift to business and consumer confidence, but most reports suggest that the effect has not been dramatic," the central bank said in its latest survey of business conditions. The central bank cautioned against reading too much into the scattered signs of a rebound, describing overall activity in many districts as still "sluggish, subpar or subdued." The survey of business conditions, known as the beige book for the color of its cover, will be used by Fed policy-makers when they meet June 24-25 to set interest rates. Many analysts are convinced that the Fed will cut rates for a 13th time at that meeting in an effort to make sure that the current weak patch the country is...

Posted by DeLong at 05:04 AM

June 05, 2003
*Sigh* More Bad Business Cycle News

*Sigh.* Atrios links to an AP report on this morning's bad economic news--an ungood unemployment insurance claims number for the very last week of May, and an ungood manufacturing orders number for April. It may be time to shave another tenth of a percent or two off of the forecast growth rate for 2003... *Sigh.* Jobless Claims Rise to Five-Week High; Factory Orders Drop in April - from Tampa Bay Online: WASHINGTON (AP) -The number of American workers filing new claims for jobless benefits climbed to a five-week high last week as companies coped with an economy that is struggling to get back on firm footing. The Labor Department reported Thursday that new applications for unemployment insurance rose by a seasonally adjusted 16,000 to 442,000 for the work week ending May 31. The increase pushed claims to their highest level since the week ending April 26. In another report, orders to U.S. factories fell 2.9 percent in April from March, marking the largest decline in 17 months, the Commerce Department said. The decrease was a lot deeper than the 1.8 percent drop economists were forecasting. Manufacturing, which has slashed jobs and cut production, has been a major trouble spot for...

Posted by DeLong at 10:38 AM

June 04, 2003
A Ray of Business-Cycle Sunlight

One sign that second-quarter growth in demand may be stronger than first-quarter growth (which, alas, does not mean that employment will stop shrinking yet): Service sector grows more than expected - Jun. 4, 2003: NEW YORK (CNN/Money) - Activity in the U.S. service sector heated up in May, the nation's purchasing managers said Wednesday, beating analysts' expectations. The Institute for Supply Management's reading of non-manufacturing activity came in at 54.5, compared with 50.7 in April. Any reading above 50.0 indicates growth in the sector. Economists, on average, expected a reading of 52, according to a Reuters poll......

Posted by DeLong at 10:02 PM

Demand News and Employment News

Reuters expects bad employment news this Friday, but thinks that the rest of the economic news is good--and that the discrepancy is because employment is a lagging indicator. I think that the discrepancy comes from the fact that underlying trend productivity growth is much more rapid than in any recession for the past generation--and this drives a big wedge between the demand news and the employment news. Forbes.com: Economists braced for gloomy U.S. jobs report: WASHINGTON (Reuters) - A postwar jump in consumer confidence and higher stock prices have raised hopes for a U.S. economic rebound, but the job market is still expected to remain listless for months to come. On Friday, the Labor Department will offer its latest snapshot on employment, for May, and analysts project it will show that businesses are still determined to keep payrolls lean. "This data may be a problem in that it could show extreme labor market weakness, but it will be a lagging indicator of what's going on in the rest of the economy," said Chris Rupkey, economist with Bank of Tokyo-Mitsubishi Ltd. in New York. "All of the anecdotal data suggests things are going to be improving," Rupkey added. U.S. economists in...

Posted by DeLong at 03:01 PM

Note: Productivity Over the Cycle

Reasonably healthy productivity growth in the first quarter... Productivity revised higher in 1Q - Jun. 4, 2003: U.S. non-farm productivity climbed 1.9 percent in the first three months of the year, the Labor Department said, an upward revision from the previously reported 1.6 percent gain....

Posted by DeLong at 06:52 AM

June 02, 2003
A Stronger Forthcoming Rebound in Investment Spending?

Morgan Stanley's Richard Berner turns pessimistically optimistic about the recovery: Morgan Stanley: Incoming data suggest that manufacturing is staging a rebound, following a slide netting more than 2% since last August.  Is the recovery coming faster than we expected a couple of weeks ago?  Certainly several positive fundamentals are in place.  Among them: Declining energy quotes, easier financial conditions, increased fiscal stimulus and reduced uncertainty, all of which should boost demand.  Moreover, a long spending drought has built some pent-up demand in Industrial America.  But it's still a two-tier manufacturing economy, with technology reviving and the rest of manufacturing struggling.  Importantly, manufacturers still face two key cyclical obstacles in a tepid global economy and still-high natural gas prices, while high legacy health and pension costs and competition from China represent key secular challenges. There are certainly glimmers of hope in very recent manufacturing data.  Purchasing managers from Chicago and Milwaukee reported a sharp improvement in both orders and overall business conditions in May over April, and their New York brethren announced that manufacturing business conditions stayed at a high level.  It still looks like a two-tier manufacturing economy, however (see "The Two-Tier Economy Revisited," Global Economic Forum, May 16, 2003). ...

Posted by DeLong at 10:23 AM

May 29, 2003
Our Current Semi-Recession

The Wall Street Journal's John Hilsenrath thinks about the fact that the rapid productivity growth of the "new economy" means that output has to grow faster than 3.5% per year for unemployment to fall. That the productive capacity of the American economy is rising so rapidly is a powerful reason for more stimulative short-run policies--and is the thing that makes the Bush administration's failure to propose a significant, real stimulus package a considerable shame. WSJ.com - This Recovery Feels Like Recession: Economy Expands, Payrolls Shrink: ...Payrolls in the electronics sector, and for producers of industrial equipment, have declined for 28 straight months. In communications, payrolls have fallen for 24 months. In the securities and airline industries, they have fallen in 16 of the past 24 months. In some ways, this is the downside of a productivity boom that created much optimism about the economy during the 1990s. Productivity growth means that companies are squeezing more output from existing workers. Over the long run, most economists agree productivity growth is good for workers, because it tends to lead to higher wages. But in the short run, it is creating a problem. Worker productivity has been growing faster than the overall economy....

Posted by DeLong at 07:51 AM

May 27, 2003
Note: Greenspan's Views as of May 2003

Greenspan's views, May 2003... Testimony of Chairman Alan Greenspan The economic outlook Before the Joint Economic Committee, U.S. Congress May 21, 2003 Mr. Chairman, I appreciate the opportunity to testify before the Joint Economic Committee. As you will recall, when I appeared here last November, I emphasized the extraordinary resilience manifested by the United States economy in recent years--the cumulative result of increased flexibility over the past quarter century. Since the middle of 2000, our economy has withstood serious blows: a significant decline in equity prices, a substantial fall in capital spending, the terrorist attacks of September 11, confidence-debilitating revelations of corporate malfeasance, and wars in Afghanistan and Iraq. Any combination of these shocks would arguably have induced a severe economic contraction two or three decades ago. Yet remarkably, over the past three years, activity has expanded, on balance--an outcome offering clear evidence of a flexible, more resilient, economic system. Once again this year, our economy has struggled to surmount new obstacles. As the tensions with Iraq increased early in 2003, uncertainties surrounding a possible war contributed to a softening in economic activity. Oil prices moved up close to $40 a barrel in February, stock prices tested their lows of...

Posted by DeLong at 10:44 AM

May 20, 2003
Yet Another Downward Forecast Revision

Yet another downward revision in the growth forecast. Yahoo! News - Economists Lower U.S. Growth Forecasts: Economists have cut their U.S. growth forecasts for the current quarter and the whole of 2003, a Federal Reserve (news - web sites) Bank of Philadelphia survey said on Tuesday. Economists expect gross domestic product to grow by 2.2 percent this year, down from their previous prediction of 2.5 percent made three months ago, the Fed bank said in its quarterly Survey of Professional Forecasters......

Posted by DeLong at 03:36 PM

May 19, 2003
Deflation Warnings

Ed Hugh points out and links to the IMF's Deflation Storm Warning....

Posted by DeLong at 07:29 AM

May 18, 2003
More Gloom

The Financial Times's Lex gets very gloomy on the U.S. economic outlook: FT.com Home US: April's US inflation data were surprisingly weak. As the Federal Reserve has made plain, inflation is at a level where further falls are not welcome. The trend is not encouraging. But the chief reason why deflation is a risk is that the economy has long been operating below trend. The improvement in the Michigan consumer confidence survey is welcome, but that has to be set against weak data on consumer and business spending. It looks like further monetary stimulus (orthodox or otherwise) is needed to aid recovery. Fiscal policy will provide some help. But the focus on the size of the "headline" tax cut is backward and there will be little bang for the buck. Goldman Sachs economists estimate that when a budget is finally passed the impact will be worth up to 0.75 per cent of gross domestic product this year. The impact from the war in Iraq could raise the overall stimulus to just north of 1 per cent - or half as much as last year. There may be some impact on stock prices from a dividend tax cut, but expectations should...

Posted by DeLong at 01:13 PM

May 16, 2003

David Pilling of the Financial Times on the latest bad news about deflation in Japan: FT.com Home US: ...Japanese deflation gathered pace in the first quarter with year-on-year prices falling 3.5 per cent - their fastest drop on record. The fall may fuel fears that Japan, which has managed to co-exist with relatively mild deflation since the mid-1990s, could be sliding into a deflationary spiral. Japanese prices - as measured by the gross domestic product deflator, considered a more accurate measure than the consumer price index - have been falling more or less continuously since 1995. Annual price falls have averaged between 1 and 2 per cent for most of that time. Friday's figures showed deflation accelerating in fiscal 2002, a year in which Japan was growing out of recession, to minus 2.2 per cent, a record for a full year. The figures were released along with GDP data showing that growth in the first quarter fell to almost zero, leading some economists to conclude that the economy was on the brink of yet another recession. Nominal growth fell 0.6 per cent in the March quarter, or minus 2.5 per cent on an annualised basis. Paul Sheard, economist at Lehman...

Posted by DeLong at 12:31 PM

The New German Recession

The Economist reports that the German economy has gone into the tank: Economist.com: ...Today it is Germany that economists point to with a mixture of contempt and alarm--emotions reinforced by confirmation on May 15th that the economy is technically in recession, with two successive quarterly declines in output. The latest figures were even worse than anticipated, with GDP falling by 0.2% in the first quarter of this year compared with the last three months of 2002. Every new number seems to bring more bad news. The unemployment data have for months been causing the German chancellor, Gerhard Schroeder, particular embarrassment. The jobless total is now higher than when he first took office in 1998, in spite of his pledge during that year's election that he would cut unemployment. Industrial production is falling, as are manufacturing orders, hit by a combination of weak domestic demand and falling exports, squeezed by the sharp rise in the euro. The decline of Europe's largest economy has worrying implications not just for its immediate neighbours but for the world economy as a whole. The government's weak and flustered response is equally troubling. Instead of using his strong mandate in 1998 to push through much-needed reforms...

Posted by DeLong at 09:54 AM

May 12, 2003
"Stimulus" Packages

Morgan Stanley's Richard Berner on the potential effectiveness of what is now being called a "stimulus" package: Morgan Stanley: ...For example, the Senate Democrats' plan has the smallest 10-year cost, but its authors claim $125 billion in first-year stimulus.  That's because most of its stimulative features are temporary and most of the revenue offsets only kick in later.  In contrast, the Senate GOP plan (as it stood at week's end) nets to a 10-year cost more than twice the size of the Democratic proposal.  Based on Congressional Joint Tax Committee data, however, we estimate that its first-year stimulus is only about $70 billion, because some of its stimulus comes on more gradually and is permanent......

Posted by DeLong at 11:32 AM

May 09, 2003
Be Careful: If You Look Into the Abyss

Morgan Stanley's Stephen Roach looks into the abyss that is the western European business cycle conjuncture, and emerges even more frightened and desperate than usual... Morgan Stanley: ...Therein lies the potential for a serious growth shock to Europe. Lacking in support from domestic demand, a sharply appreciating currency will likely deflate Euroland?s external growth cushion, unmasking the full extent of the weakness that has emerged on the domestic demand front. In that context, and with layoffs and unemployment back on the rise, it is all the more critical for policy makers to apply counter-cyclical stimulus in order to jump-start anemic growth in domestic demand. Unfortunately, those options have all but been closed off by the institutional constraints of the European Monetary Union -- the Growth and Stability Pact, which effectively rules out fiscal expansion, and the backward-looking inflation-targeting mandate of the ECB, which inhibits aggressive monetary ease.... And dramatic change is exactly what?s now in the air. The Federal Reserve said it all with its extraordinary policy statement of May 6: After nearly 18 months of steadfast denial, America?s central bank has finally conceded that the risks are now skewed toward deflation. With most of Asia in deflation and US...

Posted by DeLong at 01:58 PM

May 07, 2003
Why Oh Why Can't We Have a Competent Executive Branch? Part MCIX

Bruce Bartlett (one of the few sane people in Washington, DC, as evidenced by his decision to live in beautiful Great Falls, Virginia) has switched from believing that Job #1 is to reform and reduce the taxation of income from capital in order to boost long-run economic growth to believing that Job #1 is to boost demand and stimulate the economy over the next two years. Unfortunately, he says, as the economic news making the case for immediate stimulus stronger has dribbled in over the past half year, "the White House [which] recognizes that the political and economic landscape has changed... has simply revised its rhetoric. Now, instead of making the correct argument for its dividend plan -- that it will raise productivity, growth and incomes over time -- the White House talks only about jobs, jobs, jobs. The problem is that the dividend plan probably won't create many new jobs and very few of those will come in the short run." The Thomas option -- The Washington Times: May 7, 2003 The Thomas option Bruce Bartlett      By tomorrow , both the House Ways and Means Committee and the Senate Finance Committee will have completed mark-up of a major tax...

Posted by DeLong at 09:52 AM

May 05, 2003
Comment: U.S. Business Cycle

A comment on the U.S. economy, on the striking difference between the output picture and the jobs picture. Because of the rapid pace of business reorganization and of investment in IT--investment which has continued through the recent recession: the quarter just past saw real investment in computers and peripherals (but not in telecom!) 26% above its previous summer 2000 peak, and real investment in computers and peripherals has been growing at 24% per year since its summer 2001 trough. You in Silicon Valley aren't making much money: competition's too fierce, and prices are falling too fast. Your customers, on the other hand, are cleaning up: buying lots of very good stuff very cheap. This pace of investment drives labor productivity growth at a remarkable pace, a pace so fast that we need real GDP growth of almost 3.5% per year to keep unemployment steady. We are not going to get that in 2003. Thus whether you are optimistic or pessimistic about the near-run business-cycle future of the American economy depends not on differences in forecasts but on what you focus on: if you focus on production, you think we are in recovery; if you focus on unemployment, you think we...

Posted by DeLong at 04:40 PM

May 02, 2003
Bad Employment News

As expected, the April employment news was bad: in the cyclically adjusted numbers, the unemployment rate was up from 5.8 to 6.0 percent, payroll employment was down by 50,000 jobs, and the average workweek shrank by 1 percent. NEW YORK (CNN/Money) - The U.S. unemployment rate rose to 6 percent in April, the government said Friday, as businesses cut thousands more jobs from their payrolls. Unemployment rose from March's 5.8 percent rate, the Labor Department reported, and non-farm payrolls shrank by 48,000 jobs, after losing a revised 124,000 jobs in March. Economists, on average, expected unemployment to rise to 5.9 percent and 53,000 jobs to be lost, according to a Reuters poll."I find this report a little more reassuring than it looks on the face of it," Bill Cheney, chief economist at John Hancock Financial Services, told CNNfn. "[Some analysts] were looking for a really awful number, and getting a number close to what was expected is actually kind of a relief."The report had little impact on U.S. stock market futures, which pointed to a mixed opening on Wall Street. Treasury bond prices were little changed.Friday's report means the year-to-year net change in private payrolls has been negative for 22...

Posted by DeLong at 06:32 AM

May 01, 2003
Where Is Our Pent-Up Demand?

Where is the pent-up demand that was going to be released by the end of the uncertainty created by the hanging cloud of the War with Iraq that was? It had better show up soon, or I am going to become more pessimistic about economic prospects for the next year or two: Wall Street Journal: New data suggest the U.S. economy hasn't gained as much momentum since the end of major fighting in Iraq as many economists had hoped. The Institute for Supply Management said its closely watched monthly index of manufacturing activity fell to 45.4 in April from 46.2 in March. A reading below 50 indicates contraction in the sector. Meanwhile, the U.S. Labor Department said Thursday that the number of new workers filing for unemployment benefits declined by 13,000 to 448,000 in the week ended April 26. But the current level remains consistent with a flat or rising jobless rate, and the Labor Department's four-week moving average of claims, which smoothes out weekly fluctuations, rose to 442,000, the highest level in more than a year. The two reports "splashed a bucket of cold water on the view that there was a tremendous buildup of pent-up demand" postponed by...

Posted by DeLong at 10:09 PM

Why Oh Why Can't We Have a Better Press Corps? Part CCXIV

Time to Bang My Head Against the Wall Once Again... Why, oh why, can't we get a better class of journalists? Those who write ABC's The Note claim to be unable to understand Alan Greenspan's nuanced--and consistent--position on fiscal policy issues. They write, "The Note has no idea what Alan Greenspan thinks about the prospects for growth and about the Bush economy, and that is after reading everything he said, and everything ABOUT what he said..." And those who write ABC's The Note are close to the cream of the crop. But it's really not hard to understand Greenspan if you are willing to accept that his positions are always nuanced and that he is almost always polite. In Greenspan's view, expressed yesterday and many times in the past. Greenspan believes that: In the long run the most important thing is to have a balanced federal budget. Having a budget not in deficit is especially important over the next decade because of the forthcoming retirement of the baby-boom generation. But it is always important. Having a budget that is not in deficit is job 1. Once that is taken care of, one can turn to other goals. In the long...

Posted by DeLong at 11:35 AM

April 30, 2003
Notes: Employment Dimensions of the Current Recession

Notes: The Current Recession: Employment Dimensions The output and production recession--the one that the National Bureau of Economic Research tracks and that the business press reports--began in the spring of 2001. The employment recession began a year earlier, at about the same time as the peak of the NASDAQ. Relative to the size of America's working age population, Americans worked 6.2 percent fewer hours in the winter of 2003 than they had three years before, in the winter of 2000. The working-age population of potential workers has grown by almost exactly 3 percent in the past three years, yet the absolute raw number of hours worked has fallen by 3.2 percent. 1979-1982 may have seen a larger decline in hours--need to check... EPI understates magnitude of employment fall. Hours worked in spring 2001 already a full percentage point below hours worked in winter 2000, yet EPI starts counting from spring 2001......

Posted by DeLong at 03:45 PM

April 25, 2003
This Is the Good News?

The Economist writes about the "good news for the world economy" that we received today: that U.S. GDP grew at a 1.6% annual rate in the first quarter of 2003. This is good news? It is lower than the forecasts I had seen (up until three weeks ago). At a GDP growth rate of 1.6% per year, the U.S. unemployment rate will rise at about 1 percentage point per year, and employment will fall by roughly a million jobs a year. Plus U.S. growth is markedly faster than growth in Europe and Japan. To be fair, the Economist says that this is "only a bit" of good news. But my first reaction is that they are clearly taking too many Get-Happy Pills in the Economist's office. Economist Slow going Apr 25th 2003 From The Economist Global AgendaAmerican economic growth speeded up only slightly in the first quarter of 2003. And there is still no sign of a strong global economic rebound, according to the latest assessment from the Organisation for Economic Co-operation and Development FINALLY, a tiny bit of good news for the world economy. But it is only a bit. Figures published on April 25th showed that America's economy...

Posted by DeLong at 02:57 PM

April 15, 2003
Measuring Business Cycles

Measuring Business Cycles Date: Mon, 14 Apr 2003 09:31:44 -0700 From: Bradford DeLong jbdelong@uclink.berkeley.edu Subject: Measuring Business Cycles Status: Is the American economy still in a recession? It is clear to all that the U.S. economy reached a peak of economic activity--and the 1990s boom came to an end--in or around March of 2001, and that thereafter a recession began. But when did that recession end? In December 2001? Or is it still ongoing? The National Bureau of Economic Research [NBER], the semi-official arbiter and tracker of the U.S. business cycle, continues to stand mute about when and whether the recession came to its end. The reason that the NBER and its Business Cycle Dating Committee stand mute is that recent economic and economic policy changes have opened up a crucial ambiguity that had always been implicit in the way the NBER thought about business cycles. Since the start of the Great Depression, it has almost always been very clear when a recession has come to an end: in the months after the end of a recession, industrial production has grown strongly, total sales have reversed their decline and started to rise, firms have stopped laying off and have started...

Posted by DeLong at 04:36 PM

April 12, 2003
How Deep Is the Current Recession?

The Economic Policy Institute has found a measure according to which the current recession is actually the deepest and most severe of post-WWII recessions. The measure? The percentage by which private employment is below its peak level two years after the recession began: "In the two years since the recession began in March 2001, total payrolls have fallen by 2.1 million and private sector payrolls are down by 2.6 million." This is, of course, only part of the story: the current recession is very shallow insofar as production is concerned (in large part because of the rapid underlying productivity growth trend), moderate as far as the unemployment rate is concerned (in part because lots of people have dropped out of the labor force during this recession), and deep as far as private-sector employment is concerned. Which is the "right" measure? Well, it depends on what you are interested in, of course. A balanced picture of the perhaps-still-ongoing recession needs to comprehend all three......

Posted by DeLong at 09:19 AM

April 11, 2003
Out of Touch

The Economist complains that continental Europe's economic policies are out of touch with reality: Economist.com | Economies after the war: Europe faces many of the same problems as America, but with a much less accommodating economic policy. Conventional wisdom has long held that Europe would avoid most of America's post-bubble fall-out because far fewer Europeans own stocks. That sanguine attitude looks increasingly wrong. Investment in Europe has been contracting since the middle of 2000, and Europe's bank-dominated financial system may be exacerbating the post-bubble hangover. In Germany especially, bank profits are weak, corporate insolvencies are surging, and falling equity prices have eroded banks' reserves. An IMF analysis suggests that these factors are heightening banks' risk aversion and undercutting the credit process, a tale that bears some similarity to Japan's. Add to this the fact that labour and product markets are still too rigid, and it is small wonder that the outlook for Europe is grim. Moreover, policymakers are much less helpful than in America in easing the adjustment. Although Germany's government recently announced plans to cut job protection and improve work incentives, the overall pace of deregulation has been snail-like. With central bankers obsessed by fears of inflation, monetary loosening...

Posted by DeLong at 11:04 AM

April 09, 2003
The IMF Gets Gloomier

The IMF gets gloomier: expected year-2003 growth in Japan down to 0.5%, in Europe to 1.1%, in the U.S. to 2.3%. That should see unemployment rise by 0.5% in the U.S., and by somewhat more in Europe. In a way, the IMF's revisions shouldn't change my view: it's only summarizing news that I already knew, after all. Economist.com: ...The IMF is now expecting slower growth in the world's biggest economy than it was six months ago, and, significantly, than last year. The Fund nevertheless expects America to lead the global upturn, and argues that the world is now too reliant on American growth. A greater sense of urgency is needed to reduce dependence on America, says the Fund in its list of policy prescriptions. Easier said than done, of course. If the outlook for America is subdued, it is dismal in most parts of Europe and Japan. The IMF is clearly very worried by the poor economic performance of the euro area--its latest forecast for growth this year is less than half that produced in September. Germany is of particular concern: as the Fund points out, 2003 will be the third consecutive year that Europe?s largest economy has grown at...

Posted by DeLong at 12:00 PM

April 07, 2003
From the Land of the Pygmy Chimpanzees

Edward Hugh has a couple of very nice and thoughtful pieces on the current state of the European and world economies. In the firstBONOBO LAND piece he worries about differential regional inflation rates within Europe, the use and abuse of Harrod-Balassa-Samuelson, index number problems, and how it is "time to throw away the cucumber sandwiches and the fine lace and go to work to try to clutch Germany from the jaws of deflation before it's too late (assuming, that is, that it already isn't)." The second BONOBO LAND piece urges us all to email Morgan Stanley's Stephen Roach and tell him that we are listening to him--that we find his arguments that the world is on the edge of deflation crisis to be alarmingly powerful, and that he is not just spitting into the wind as far as his influence on the background intellectual climate in which economic policy is made is concerned....

Posted by DeLong at 12:30 PM

April 06, 2003
More Bad Unemployment News

John S. Irons reports more bad employment news: The employment situation remains poor. Data released by the Bureau of Labor Statistics shows that the unemployment rate for March remains unchanged at 5.8%, and, in addition, total nonfarm payroll employment declined by 108,000 after seasonal adjustment. Overall, these numbers again point to the idea that the economy is in somewhat of a holding pattern. Overall growth appears to be weak, leading to the decline in employment, yet the unemployment rate has been holding steady at just under 6% for the past year. Given how lousy the employment numbers have been over the past year, it is remarkable that the unemployment rate has not risen by more......

Posted by DeLong at 08:43 PM

April 02, 2003
Time to Start Worrying About a Double-Dip

Time to start worrying about a double-dip recession: Factory orders drop 1.5% in February - Apr. 2, 2003: WASHINGTON (Reuters) - Orders for U.S. manufactured goods slumped sharply in February, the Commerce Department said Wednesday in a report hinting at increased caution among firms ahead of the start of the Iraq war. The Commerce Department said orders fell a larger-than-expected 1.5 percent to $321.16 billion in February, following a revised 1.7 percent increase in January. Orders for durable goods -- items such as cars and appliances meant to last three or more years -- fell 1.6 percent, a bigger fall than the previously reported 1.2 percent drop. Wall Street analysts had been anticipating a smaller drop in overall factory orders, with the average forecast in a survey by Reuters calling for only a 0.6 percent decline. Orders in almost all major categories of manufactured goods were down. Non-durable orders were also down, falling 1.4 percent, their largest decline since February 2002, the department said....

Posted by DeLong at 06:12 PM

March 31, 2003
Latest NBER Business-Cycle Report

The latest NBER business-cycle memo. I think it's time to wander down the hall and ask David and Christie Romer whether the inability of the Committee to decide now--fifteen months after what I see as the recession trough--whether we are in an expansion or not is not sufficient reason to rethink the whole business-cycle methodology that Wesley Clair Mitchell set up for the NBER. The NBER's Recession Dating Procedure: ...According to the most recent data, the U.S. economy continues to experience growth in output and income without growth in employment. Employment, which grew in January after several months' downturn, declined substantially in February. Because employment is still at a low level, it remains our conclusion that additional time is needed to interpret the movements of the economy last year and this year. The NBER's Business Cycle Dating Committee will determine the date of a trough in activity when it concludes that a hypothetical subsequent downturn would be a separate recession, not a continuation of the past one. The trough date will mark the end of the recession. The committee will not issue any judgment about whether the economy has reached a trough until it makes its formal decision on this...

Posted by DeLong at 03:16 PM

Note: State of the Business Cycle

The Economist now projects that the Euro area's economy will grow at 1.1% in 2003, that the Japanese economy will grow at 0.5% per year in 2003, and that the American economy will grow at 2.5% per year in 2003. I don't see why the America number is so high, given that the business-cycle news since January 1 has not been encouraging....

Posted by DeLong at 03:09 PM

March 30, 2003
Stephen Roach Says (Economic) Doom Is at Hand

Morgan Stanley's Stephen Roach says that economic doom is at hand--that the most likely scenario for the world economy over the next four years is stagnation. I wish his arguments weren't so strong, and his scenario wasn't so believable: Morgan Stanley: ...America?s current-account deficit surged to an annualized $548 billion in the fourth quarter of 2002, a record 5.2% of GDP. The financing of such a shortfall requires $2.2 billion of capital inflows each business day -- hardly a trivial consideration for a low-return, post-bubble US economy. Nor is this a stable situation. As America?s federal budget goes deeper into deficit, the country?s net national saving rate -- consumers, businesses, and the government sector, combined -- could easily plunge from a record low of 1.6% hit in late 2002 toward ?zero.? If that occurs, the US current-account deficit could approach 7% of GDP -- requiring about $3 billion of foreign financing each business day. History is pretty clear on what happens next -- a classic current account adjustment. This will entail a very different macro outcome for the United States -- namely, a weaker dollar, higher real interest rates, and a slowdown in domestic demand. That?s precisely the scenario that...

Posted by DeLong at 08:22 AM

March 26, 2003
Sung Won Sohn at Wells Fargo Is Depressed

Sung Won Sohn at Wells Fargo is depressed about the current state of the business cycle. Data continues to come in significantly weaker than I had thought it would, but I have not yet thought seriously about what it means for the forecast... Forbes.com: WRAPUP 1-Data paints weak picture of U.S. economy: WASHINGTON (Reuters) - Business spending fell and home buying slowed sharply in February, the government said Wednesday, while the number of Americans unable to make credit card payments at the end of last year climbed. Durable goods orders in February sank 1.2 percent, the largest fall since November, while sales of new homes fell to their lowest level in more than two years. Credit card delinquencies in the final quarter of last year rose to their highest level since records began in 1990. "The economy is basically stalled, treading water at the moment. The combination of geopolitical uncertainties, the inclement weather, the lousy stock market and lack of confidence are all combined to depress economic activities for the moment," said Sung Won Sohn, chief economist at Wells Fargo....

Posted by DeLong at 12:59 PM

March 25, 2003
Declining Consumer Confidence...

Disappointing, but not unexpected: FT.com Home US: US consumer confidence declines again. By Peronet Despeignes in Washington. Published: March 25 2003 15:33 | Last Updated: March 25 2003 15:33 | US consumer confidence fell to a new  nine-year low in the days leading to the beginning of the US war with Iraq, according to figures released on Tuesday. The Conference Board said its index of consumer confidence fell to a preliminary 62.5 in March, the lowest reading since October 1993. The index, which is based on a monthly survey of 5,000 households, has fallen more than 40 per cent from last  year's high of 110.3 in May......

Posted by DeLong at 08:53 PM

March 14, 2003
Declining Growth Forecasts

The chance that the unemployment rate would fall this year has been low for quite a while. Now I can't see more than one chance in five of an improved labor market by late fall. WSJ.com - Economists Scale Back Forecasts for First Half: ...In a $10 trillion economy, this drumbeat of declining expectations takes a toll. The downgrades between last month and this one amount to about $29 billion in annual economic output that was expected but now seems unlikely to materialize anytime soon. That averages to about $100 of expected output per person that won't be realized. "The outlook is rather grim," says Richard Yamarone, director of economic research at Argus Research Corp. in New York. "Employment has eroded, energy prices are soaring and business investment isn't likely to register any meaningful gain, given the lackluster projection for corporate profits." He cut his growth estimate for the first quarter to 1.4%, from 2% estimated a month ago. About three in four economists surveyed lowered their forecasts. Economists cited a number of reasons for their growing economic pessimism, but one issue stood out. When asked to name the major factor responsible for the economic malaise, 50% cited "war jitters,"...

Posted by DeLong at 02:11 PM

The Senate Centrists Flex Their Muscles

The center of the Senate flexes its muscles. It is a good sign. It would have been a better sign if they had also said that tax cuts must be frontloaded--that it is worth increasing the deficit over the next two years or so to stimulate employment, but that this year's budget should produce projected surpluses between seven and ten years from now: Dear Majority Leader Frist and Minority Leader Daschle: With the international challenges our nation faces, including a possible military engagement with Iraq, continuing tension on the Korean Peninsula, and the ongoing war on terrorism, coupled with sluggish economic growth, we believe it is critical a budget resolution for Fiscal Year 2004 (FY2004) be enacted this year. We are committed to working in a bipartisan manner to this end. We believe that our nation would benefit from an economic growth package that would effectively and immediately create jobs and encourage investment. We appreciate President Bush's leadership in identifying this need and beginning this important debate with his economic growth proposal. Given these international uncertainties and debt and deficit projections, we believe that any growth package that is enacted through reconciliation this year must be limited to $350 billion...

Posted by DeLong at 02:00 PM

March 13, 2003
The Economist Is Also Worried About Government Bankruptcy a Generation Hence

The Economist is also worried about government bankruptcy--which usually takes the form of serious inflation--a decade hence. But it is more scared of deflation now: it doesn't want attachment to long-run fiscal and monetary rectitude to stall stimulative short-run policies. Economist: ...Governments everywhere should certainly fret about their long-term fiscal health, not least because of future pension and health-care costs; but not if it means choking their economies now. Japan has shown graphically how trying to trim a budget deficit when an economy is weak can actually worsen a country's long-term fiscal position. America and Europe must not risk following suit......

Posted by DeLong at 08:34 PM

The Economist Is Scared of Deflation Now

The Economist is scared of deflation now. They want the Federal Reserve to cut interest rates, the European Central Bank to do the same, and governments to run bigger budget deficits over the next couple of years: Economist.com: ...Some economists argue that, since the present weakness in American confidence and spending is largely due to uncertainty about the consequences of a war with Iraq, it might be better to hold fire for now and see what the economy looks like once the conflict is over.... This argument is wrong, for two reasons. First, at a time of heightened uncertainty, it is wiser to take out an insurance policy against a future deep downturn. If a rate cut proves unnecessary, the cost of reversing it would be small. On the other hand, if the American economy remains weak, valuable time will have been gained in giving it an extra boost. When the world economy is groaning with spare capacity, there is little risk that any excessive easing of policy might send prices soaring. A greater risk is of deflation, not inflation. The lesson of Japan's failure to arrest deflation after its bubble burst in the early 1990s is that, as interest...

Posted by DeLong at 08:30 PM

March 10, 2003
Increasing Business Cycle Pessimism

Morgan Stanley's Global Economic Forum revises downward its estimates of U.S. growth in the first half of this year: Morgan Stanley: Richard Berner and David Greenlaw (New York): Although we revised our U.S. and global economic forecasts sharply lower only two weeks ago, rapidly changing events call for more frequent revisions (see "Tipping Point?" Global Economic Forum, February 24, 2003).  Energy and sentiment shocks are pushing the U.S. economy to the brink of recession.  The surge in energy quotes has put a heavy tax on both consumers and businesses, in our view amounting to some $60 billion at an annual rate in the first half of 2003, and the tally could be higher.  The energy shock has hit a weak global economy, and that weakness represents an additional burden on U.S. growth.  Laid on top of the uncertainty related to impending war with Iraq, this shock could be the final blow that pushes the U.S. economy over the edge.  It's a close call, but we think that the economy is resilient enough to skirt an outright downturn.  Moreover, lower prospective energy quotes, additional policy stimulus, some pent-up demand and reduced risk aversion should promote a lasting rebound.  In what follows,...

Posted by DeLong at 06:41 AM

March 07, 2003
Employment Report Today Not Good

John S. Irons summarizes today's unemployment report. It is significantly worse than I, at least, was expecting... ArgMax Economics Weblog: Employment Situation: Not good: The Bureau of Labor Statistics released its monthly employment report today. The unemployment rate was up 0.1 to 5.8% in February. The big news in the report, though, was that total (non-farm) payroll employment fell by 308,000 after seasonal adjustment. This seemes to have been interpreted as a big negative for the economy and was much larger that expected. Keep in mind that the employment data is often called a "lagging indicator," meaning that the statistic tends to reflect the past state of the economy more that it indicates where the economy is headed. The weak employment number tends to indicates what we already know - that the economy was indeed weak; but it does not necessarily mean the economy is headed further downward. However, for the unemployed - and those looking for jobs - it is certainly not good news......

Posted by DeLong at 04:57 PM

March 04, 2003
No, Marty Feldstein Is Not "Voting" Against Bush...

ABC News's The Note now counts Marty Feldstein as a dissenter from Bush Administration economic policy. This does not seem to me to be true. Marty agrees with the Bush Administration in wanting to see taxes fall as a share of GDP. Marty is thinking more clearly than the Bush Administration in that he is focused--has long been focused--on the necessity for a severe pruning-back of the social-insurance state if reduced tax shares are to be a durable reality. (The Bush Administration wants to leave this as a problem for future Presidents, future Congresses, and future generation.) Where Marty dissents--and this has been the case for at least a year--is in viewing the current situation in which unemployment is above its natural rate and the economy is approaching the edge of deflation as... well, as a sign that stimulus is needed. In short, this was no surprise to me or to anyone else who has been watching Marty's thinking over the past year. Yet it seems newsworthy to The Note, which is one of the very best political newsletters around. Yet another example of how what seems very basic and fundamental to economists somehow turns into an unobservable nuance for...

Posted by DeLong at 01:02 PM

March 01, 2003
John Irons Tracks the Economy

John F. Irons tracks the economy... ArgMax Economics Weblog: Tracking the Economy: This has been a busy week for economic news; I thought I would give an update for the week: 2002Q4 GDP revised up to 1.4% (from a previously estimated 0.7%). Better, but not great. Hubbard out, Mankiw in at the CEA. His nomination shouldn't have been controversial - he is an accomplished and respected academic macroeconomist (and a fellow MIT PhD), but some right-wing supply-side economists are unhappy about what he wrote in his Principles book about Reagan's policies. Oil Prices are hitting 12-year highs and getting close to 40$ a barrel. Consumer prices rose 0.3% in January and wholesale prices (the PPI) jumped 1.6%. The increases were due in part because of rising energy prices. The core CPI and PPI (which exclude food and energy) increased by 0.1% and 0.9%, respectively. If the PPI increases continue and make their way to consumer prices, it will cause the Fed to think twice before reducing interest rates in the case of a "double dig" recession. On the bright side, the increases should lessen deflation fears. Consumer confidence fell to 9-year lows. The link between the Conference Boards' index and...

Posted by DeLong at 05:49 PM

February 24, 2003
Morgan Stanley Reduces Growth Forecast

Morgan Stanley reduces its forecast for U.S. growth in 2003. A 2.1% year-over-year growth estimate carries with it the implication that the unemployment rate will rise in 2003 to 6.5 or higher, depending on how rapid you think underlying fundamental productivity growth is. Morgan Stanley: Richard Berner and David Greenlaw (New York and London): We're downgrading our US and global economic forecasts.  In our view, surging energy prices and the shock to consumer and business sentiment from today's stalemate over Iraq and tomorrow?s likelihood of war will tax growth appreciably.  Year on year, we now expect US real growth this year to struggle to an anemic 2.1%......

Posted by DeLong at 07:50 PM

September 14, 2002
Greenspan 5, DeLong 2

"You know me," said one senior Federal Reserve policymaker of the 1990s, "and on the inflation-unemployment tradeoff I'm dovey-dovey. I'm not prone to undercount the distributional and productivity benefits from low unemployment. I'm not prone to overweight the costs of moderate inflation. Yet there I was, in the Chairman's [Greenspan's] office, beggin him to raise interest rates. The NAIRU [the unemployment rate at which inflation is steady] couldn't have fallen that far. Potential growth couldn't be that fast. But he would say, 'It doesn't feel like an economy in which inflationary pressures are building'. And he was right. Whenever we monetary economics types get together, sooner or later the topic of conversation turns to Alan Greenspan. "He's not a God," somebody will say. We will agree that he's not a God. "He has a hard time giving a coherent explanation of why he holds his views," someone else will say. We will agree. Often, after a Greenspan explanation, our only reaction will be, "Huh?" "But why is his judgment so good? Why is he so right so often?" someone else will say. And we will have no answer. He knows things about how to analyze the modern business cycle that...

Posted by DeLong at 01:45 PM

September 13, 2002
Handout--the Current Economic Situation in the U.S.

Next Year's Analyses Next February the Commerce Department's Bureau of Economic Analysis is going to release its first estimates of production and productivity for the year 2002. When they do, everyone is going to sit up and take notice--because the numbers will be very surprising. We today already know (although very few think about it) what those numbers will be in rough outline: some 13/16 of the data for the year-to-year growth rates from 2001 to 2002 is already baked in the cake. So let's take a look at what next February's data releases are going to show: The growth rate of output per hour between 2001 and 2002 is going to be absolutely huge. Labor productivity growth will--unless our forecasts of what has happened in the third quarter and will happen in the fourth quarter are really, really off--be faster than in any year since the Korean War. The extraordinarily, ridiculously high productivity growth rates in the fourth quarter of 2001 and the first quarter of 2002 guarantee it. Labor productivity growth in 2002 relative to 2001 is a far cry from the 0.9 percent per year of the period from the mid-1970s productivity slowdown to the mid-1990s. Labor...

Posted by DeLong at 07:11 PM

Paul Krugman on the "Economic Rationale" for War Against Iraq

Perhaps the stupidest things written about what action should be taken in response to Iraq's flouting of U.N. resolutions on its armaments are Larry Kudlow's cry to invade Iraq to raise the Dow and John Podhoretz's cry to invade Iraq to elect more Republicans to Congress in November. Here Paul Krugman takes on the mostly-whispered claim that a war against Iraq would be "a good thing" for the American economy. Needless to say, policy should rest on whether Saddam Hussein is the successful object of containment policies--a cautious tyrannical madman--or is likely to develop and use weapons that will turn New York or Tel Aviv into abattoirs, not on its effect on the year-over-year growth rate of real GDP. Stocks and Bombs: ...World War II is a very poor model for the economic effects of a new war in the Persian Gulf. On balance, such a war is much more likely to depress than to stimulate our struggling economy. There is nothing magical about military spending — it provides no more economic stimulus than the same amount spent on, say, cleaning up toxic waste sites. The reason World War II accomplished what the New Deal could not was simply that...

Posted by DeLong at 11:00 AM

September 12, 2002
More People Worry About Deflation

The Economist steps up to the "let's worry about deflation" plate. I agree with them. The Federal Reserve, however, does not seem to: the Federal Reserve appears to believe that the NAIRU--the unemployment rate at which inflation is constant--is somewhere near 5.5 percent (rather than the 4.5 to 5.5 percent I would estimate), and that the rate of growth of potential output--which is the rate at which real GDP has to grow to keep the unemployment rate constant--is only a shade above 2 percent per year (rather than the 3.5 percent per year that I would estimate). Economist.com: ...As a result, there is a risk that, before the end of 2003, the rich world's three biggest economies—America's, Japan's and Germany's—could all have negative inflation rates. A sharp jump in oil prices as a result of America invading Iraq could, of course, push up headline inflation. But the longer-term impact of higher oil prices would be deflationary, not inflationary. Higher oil prices operate like a tax that depresses growth, so their medium-term impact would be to heighten the deflation risk. DeAnne Julius, a former member of the Bank of England's monetary policy committee, argued in a recent speech that there is...

Posted by DeLong at 04:45 PM

September 11, 2002
Economic Consequences of 911

The Economist points out that the economic effects of 911 have been much smaller than many of us feared. Of course, the terrorists have also proved much more inept than I, at least, feared. If you'd asked me in late September what the chances were that Al Qaeda would not successfully strike at American civilians again within a year, I would have put those chances at one percent. Economist.com Of course, in the initial aftermath of the terrorist attacks, the world Of course, in the initial aftermath of the terrorist attacks, the world’s stockmarkets plunged still further. Economists were unanimous: the events in New York and Washington delivered an enormous blow to confidence. Airlines were on the brink of collapse as passengers vanished, afraid to fly. American retail sales virtually dried up in the days after the attacks as people stayed at home, glued to their televisions. But economists could not agree on how prolonged these short-term effects would be. Previous experience with massive economic shocks suggested that their impact tended to be relatively short-lived and relatively modest over the medium term. On September 12th last year, though, it was impossible to know whether that pattern would be repeated. Nobody...

Posted by DeLong at 04:46 PM

September 09, 2002
Stephen Roach on "The Great Failure of Central Banking"

I don't agree with Stephen Roach that the Federal Reserve should have made interest rates higher and tried to make unemployment higher in the late 1990s in order to diminish investment spending and collapse the stock market bubble. In my view, the time to deal with any problems created by the bubble's collapse is when the bubble collapses--not before. Relative to a lower-stock prices, lower-investment, one-percentage-point-of-unemployment-higher bubble-popping path for the U.S. economy in the late 1990s, the actual path that we took gave us an extra $1 trillion of real production. You can complain about how that $1 trillion was distributed. You can regret that a large chunk of it--$200 billion?--was spent on investments that have much lower social value looking forward than their social cost. You can fear the damaging consequences of banruptcy and fraud on the economy. But you have to argue that these drawbacks from the fallout are quantitatively very large for the cost-benefit analysis to go Stephen Roach's way. Nevertheless, he makes his case more strongly than anybody else does: Morgan Stanley: ... Yet out of this glorious disinflation a new inflation was borne -- asset inflation. And central bankers didn’t have a clue how to...

Posted by DeLong at 09:58 AM

September 08, 2002
Ball and Mankiw on the "Natural Rate" of Unemployment

Larry Ball and Greg Mankiw have a very nice paper on the unemployment rate at which inflation is stable--the so-called NAIRU. The most fascinating part of the paper deals with the question of why the U.S. NAIRU fell so far and so fast in the 1990s. Ball and Mankiw find that they lean toward the hypothesis that the NAIRU is actually closely linked to the trend rate of productivity growth. The NAIRU in Theory and Practice: NAIRU stands for the nonaccelerating inflation rate of unemployment. It is beyond dispute that this acronym is an ugly addition to the English language. There are, however, two issues that fail to command consensus among economists, which we address in this essay. The first issue is whether the concept of NAIRU is a useful piece of business cycle theory. We believe it is, and we begin this paper by attempting to explain why. In our view, the NAIRU is approximately a synonym for the natural rate of unemployment. This concept follows naturally from any theory that says that changes in monetary policy, and aggregate demand more generally, push inflation and unemployment in opposite directions in the short run. Once this short-run tradeoff is admitted,...

Posted by DeLong at 08:35 AM

Japan's Recession

The Japanese data revisions are in, and they are even worse than anyone--or at least than I--had feared, even fearing that they were worse than we hard feared. The second quarter of 2001 saw real GDP shrink at an 8 percent annual rate. The first quarter of 2002--which had supposedly seen GDP grow at 6 percent per year--was completely flat. All this leaves Japanese real GDP today some 2.5 percent below its level in the fourth quarter of 20002. Economist.com: Earlier this year, optimists could at least take solace from signs that the economy was rebounding in the first quarter, from a dismally deflationary 2001. It now turns out, however, that all of that growth was illusory. After revising the way it tots up the figures, the government announced at the end of August that GDP growth had been zero in the first quarter, not the 5.7% annual rate that was announced earlier. The second quarter was better, but not especially reassuring, with GDP rising at an annual rate of 1.9%. Industrial production rose sharply in April and May, but it tailed off again in June and July. Domestic demand refuses to show a convincing bounce, leaving the economy desperately...

Posted by DeLong at 06:06 AM

September 06, 2002
Think Analytically!

Think Analytically! I remember one day during the first Clinton Administration when Joe Stiglitz came into the room to chair a meeting, looked around, noticed that--so far--only economists had shown up, and announced that nobody who did not have a Ph.D. in economics would be allowed to speak at the meeting. (Do I need to point out that that Joe was making a joke?) He was. All of us got it. All of us cheered and applauded. We did so not because we Clinton-era economists all agreed on all the issues--anybody with half an ear to the ground would know that we did not. We did so because we had found that it was possible to make intellectual and policy progress in discussions with economists because we had all been trained to think analytically: to break the issue down into background assumptions about the world, beliefs about the principal causal mechanisms, and claims about the likely effects of different policies on those chains of cause-and-effect. When we disagreed--as we often did--we could quickly ascertain where and why, and then agree on how to go hunting for pieces of information that would help resolve the disagreement. This was in striking contrast...

Posted by DeLong at 05:58 PM

The Economist Joins the Pile on Alan Greenspan

This week's "Economics Focus" in the Economist joins the pack piling on to Alan Greenspan for not deflating America's stock market bubble earlier: Economist.com: ...There may be no painless way to deflate bubbles. Yet the correct test is not whether a bubble can be deflated without some loss of output. Rather, it is whether the early pricking of a bubble causes less pain than letting it grow only to burst later. The longer a bubble is allowed to inflate, the more it encourages the build-up of other imbalances, such as too much borrowing and investment, which have the power to turn a mild downturn into something nastier. If the Fed had let some air out of the bubble earlier, America's economy might now be better placed for future growth... Admittedly, for the Fed to justify an increase in interest rates when inflation was low would have been hard—but not impossible. It could, for instance, have argued that raising rates and so containing financial imbalances would avoid future economic instability and hence a large undershoot in future inflation. Central bankers do not have a political mandate to respond to asset prices. Even so, Mr Greenspan could still have done more to...

Posted by DeLong at 03:10 PM

BLS August Report

The Bureau of Labor Statistics reports that businesses employed 39,000 more people in August than they did in July (on a seasonally adjusted basis). The BLS also reports that its survey of households produces an estimate of 429,000 more Americans at work in August than in July. Which is more reliable? I have always trusted the business employment survey rather than the household survey as a more reliable business cycle indicator. This month, it is the one that is more pessimistic about the state of the economy. Employment Report...

Posted by DeLong at 01:33 PM

September 03, 2002
Europe's Economic Policy Dilemmas

Here Morgan Stanley's Eric Chaney gives his take on western Europe's current fiscal policy dilemma. Given that the European economies are on the edge of recession, it makes neither economic nor political sense for them to cut their short-run budget deficits. But neither the "Stability and Growth Pact" nor the discourse about European fiscal policy allows one to try what the Clinton administration wanted to try in 1993--a larger deficit now coupled with lots of planned reduction in the deficit in the future. Morgan Stanley: Euroland: The Arithmetic and Politics of Fiscal Policies - Part I...

Posted by DeLong at 12:49 PM

In the Shadow of the Grand Tetons

Richard Berner from Morgan Stanley gives his take on the conversation at last weekend's Federal Reserve Jackson Hole symposium (sponsored by the Federal Reserve Bank of Kansas City). From my perspective, the strangest and most worrisome thing about his report of the conversation is the "European" belief that interest rates have to stay high to promote the "liquidation" of potentially bankrupt enterprises. This is not a strong current of thought in America (save, perhaps, for the pages of the New Republic): ...Few U.S. monetary policymakers fret that low interest rates will forestall corporate downsizing, because they believe that U.S. financial markets are appropriately denying capital to those sectors where gluts are biggest, or giving it to new management who will clean house. On the contrary, some officials worry that Corporate America is hesitant to hire. So while they are guardedly optimistic, they seemed more open-minded about the need for additional stimulus than recent press commentary had suggested. All agreed that the U.S. economy's resilience in the face of financial shocks was comforting, but no guarantee that it would persist.... With oil prices meaningfully higher than we forecast, I share their concern that fourth-quarter growth could zigzag back toward 2%. Such...

Posted by DeLong at 12:39 PM

September 01, 2002
The New German Problem

Project Syndicate: The New German Problem: J. Bradford DeLong : September 2002 As Germany prepares to elect its next Chancellor, the two main candidates, Gerhard Schroeder and Edmund Stoiber, agree on one thing: unemployment must be reduced. Over the past two decades, high unemployment has transformed Europe in general and Germany in particular into a sociological time bomb. What will the unemployed - especially the long-term unemployed with only dim memories of integration into the world of work - do with themselves and their time? What will happen to confidence in governments that can not solve the problem? It is easy to forget that little more than 50 years ago, Europe was the world's most violent continent. Europeans spent the previous forty years slaughtering each other on a scale unprecedented in human history. Against this backdrop, Western Europe after 1950 was remarkably peaceful and stable, even taking into account the fall of the French Fourth Republic and the transitions from dictatorship to democracy in Portugal, Spain, and Greece. The most remarkable transformation of all was that of the Federal Republic of Germany. Anyone familiar with German history since 1800 is still astonished at the enthusiasm with which the nation that...

Posted by DeLong at 04:44 PM

August 28, 2002
Defending the Economy by Attacking Asset Prices?

I have always been of the school that central banks should watch asset price bubbles with alarm, but should not raise interest rates in order to try to prick them. My guiding principal has thus been: "Sufficient unto the day is the evil thereof." I suppose I have been most affected by the memory of the Great Depression, where the Fed's desire to restrain asset prices generated interest rate increases that played a role (how big a role is still in dispute) in starting the snowball that became the avalanche of the Great Depression. Here Samuel Brittan cautiously, judiciously makes the case for a more aggressive policy toward asset price bubbles. I'm unconvinced, but it is certainly worth thinking about. Samuel Brittan: Taking asset prices seriously: ...a regime of inflation targets alone has now come under criticism for a different reason. The fear now is not that real output has been neglected but that asset prices have been. There is a vigorous if rarefied debate about whether asset prices as well as consumer price inflation should be specifically targeted. The riposte of central bankers is that asset prices are in fact taken into account insofar as they are expected to...

Posted by DeLong at 09:17 PM

August 26, 2002
The Japanese Economy Is in Worse Shape Than I Had Thought

The Financial Times reports that recent Japanese economic statistics are about to be revised sharply downward--and that taken together the first and second quarters of 2002 will show a real GDP growth rate of only 1.5 percent per year. Thus the hopes--based on preliminary first-quarter statistics--that Japan was pulling out of its long depression appear to have been false. New data may cast doubt on Japan recovery By David Pilling in Tokyo Published: August 26 2002 17:22 | Last Updated: August 26 2002 17:22 Japan may this week drastically scale back preliminary estimates for first-quarter growth, removing much of the gloss from what many had hopefully interpreted as a sharp rebound from the country's worst post-war recession.An improvement in the methodology by which gross domestic product is calculated could see revised GDP numbers for the first three months, due to be published on Friday, fall to about half the initial estimate of 1.4 per cent. The original figure implied an annualised growth rate of an improbable 5.7 per cent."I think it is pretty much established that the new figures will show that GDP did not perform as well as originally stated because those initial figures were based on wildly exaggerated...

Posted by DeLong at 10:01 AM

August 24, 2002
Louis Uchitelle of the New York Times Also Worries About Deflation

Louis Uchitelle writes about the danger of deflation--and wonders why more people aren't worrying about it. I think the answer is that people are worrying about it. However, it's not yet a crisis, or even a clear and present danger. But it does seem to me that it could become a clear and present danger in a year, if things do not break favorably. Cost-Cutting Can Start a Ruinous Circle: ...Why isn't that danger uppermost in everyone's mind? Why are forecasters like James Glassman, a senior economist at J. P. Morgan Chase, so optimistic? In a nutshell, they expect an infusion of demand from somewhere that will reverse the cost-cutting and persuade companies to expand investment, production and hiring. Their main hopes are more tax cuts, more growth in federal spending and more interest rate cuts by the Federal Reserve. They also count on people to finance consumption by continuing to extract equity from their homes, which are still rising in value. Mainly, though, it is stimulus from Washington that for Mr. Glassman will save the day. "If Washington cannot get us moving toward full employment within a year," he said, "then there will be more federal stimulus. We have...

Posted by DeLong at 09:28 PM

August 20, 2002
Falling Forecasts of Short-Run Growth

David Wessel and Thomas Sims of the Wall Street Journal report on how the consensus forecasts of near-term economic growth worldwide are being cut back. Former Fed Governor Larry Meyer provides context: WSJ.com - Major Business News: ...In the U.S., the very slow growth in payrolls and the decelerating pace of wage gains threatens to pinch household income. Household wealth has been whacked by the weak stock market. And business investment spending is restrained by "a sense of pessimism and a reluctance to take risks," says Mr. Meyer, the former Fed governor. Consumer spending and housing have been impressively resilient, and another round of no-interest financing by auto makers will help the economy in the current quarter. "But," he says, "the only way to keep the economy going in the fourth quarter is to get a significant rebound in business fixed investment, and that doesn't seem to be in train."......

Posted by DeLong at 06:57 AM

August 18, 2002
Paul Krugman Sounds Nervous

Paul Krugman sounds nervous. Paul Krugman sounds very nervous. I think he's right: I'm very nervous too--especially given the whispers I hear from Wall Street which suggest that our current problems in corporate reporting may drive large wedges between the interest rates the government can borrow at and the terms on which businesses can raise capital. SOME DEFLATION THOUGHTS: (8/17/02) A followup on Friday's NYT column: first, Brad DeLong is quite right that there's no such thing as excess capacity for the economy as a whole. I've been vociferous about that myself in the past. What I meant to say was over-investment in short-lived business capital, mainly tech, relative to other resources - which is the sense in which an over-investment model of the business cycle can be justified - the same sense in which business as a whole can find itself with excess inventories. That's a longish story, and quite tricky to model - more when I have some spare time (hahaha!). Now, about the risks. My back-of-the-envelope estimate of the current output gap is the same as his - 4 percent. That could be wrong - we don't really know how overheated the economy was at its peak....

Posted by DeLong at 08:05 AM

August 17, 2002
America's Recession: The Risk of a Double-Dip

Late last winter America's central bank--the Federal Reserve--was busy congratulating itself. The flow of economic data indicated that its cut of the nominal short-term Federal Funds interest rate to 1.75 percent per year had done the job: the recession of 2001 was coming to an end. Even with the new, more pessimistic consensus expectations of the payoffs from the information technology revolution, even with the consequences of the terror-attack on the World Trade Center, money at 1.75 percent per year was cheap enough for America's businesses to once again increase their borrowings and continue to invest. Then in the late spring, came the revelations of the size of the corporate governance crisis: everyone learned just how unreliable the accounts reported by American telecommunications companies were, and just how much the American system of corporate surveillance and control had deteriorated during the bubble of the 1990s. The American stock market fell: it is now 15 to 20 percent below its levels of last winter. The spreads between the interest rate at which America's government could borrow and the interest rates at which America's corporations could borrow widened. Suddenly, there was less cause for self-congratulation at the Federal Reserve: a 1.75 percent...

Posted by DeLong at 11:14 AM

August 16, 2002
How Large Is the Output Gap?

How large is the output gap--the gap between the economy's current level of production and potential output, the level of production consistent with stable inflation? Paul Krugman has some smart things to say about this question. My answer? That two years ago the output gap was -1 percent--that is, actual production was 1 percent higher than the level consistent with stable inflation--and today the output gap is 4 percent: we could be making 4 percent more stuff without having to even begin to worry about inflation starting to creep upward. I do, however, have one criticism to make of Paul Krugman's argument. He talks about "excess capacity." There can be--and is--excess capacity in individual industries, like telecom (although this will be quickly taken care of as telecom firms go bankrupt, their assets are taken over by other companies with rational capital structures, and telecom service prices fall through the floor). There's no such thing as "excess capacity" for the U.S. economy as a whole. Further declines in the dollar would spur demand for U.S. exports and for U.S. producers of import-competing goods. Further declines in interest rates would (with proper management of the state of our financial institutions and operating...

Posted by DeLong at 01:50 PM

August 15, 2002
The Course of the Recession

Last month's revisions to the NIPA produced a three-quarter decline in real GDP in 2001, instead of the preliminary one-quarter decline. Nevertheless, real GDP declined by only 0.6 percent before beginning its bounce-back in the fourth quarter of 2001. But the most interesting series remains the unemployment rate, still trending upward as real GDP grows less rapidly than productivity plus the trend increase in the labor force, and thus the proportion of America's potential workers left idle continues to grow. Charts from the Wall Street Journal....

Posted by DeLong at 04:22 PM

August 14, 2002
Cats and Dogs Almost Living Together

Raining frogs, plagues of locusts, cats and dogs living together! I agree with the Wall Street Journal editorial page: WSJ.com - Major Business News: ...we'd like to offer one post-Waco suggestion. To wit, that President Bush convene a more workable forum and think seriously about economic policy. We'd suggest he lock himself in a room with Larry Lindsey from the White House, Glenn Hubbard from the Council of Economic Advisers and John Taylor from the Treasury. Then he could reach out to Stanford University to add Michael Boskin... That's a good idea. An economic policy made by those people would be much much better than our current made-by-White-House-Communications policy. On second thought, I don't agree with the WSJ. They add to that list: John Cogan and Martin Anderson. Anderson is the Reagan hack who misrepresented what the sources of the 1980s deficit were. John Cogan spent the late 1980s and early 1990s arguing that budget deficits were caused by the institutional structure of Congressional decision making. To the best of my knowledge, he has never found the time to acknowledge that the end of the deficit in the 1990s was in striking contradiction to all his writings. For the rapid...

Posted by DeLong at 11:17 AM

August 11, 2002
No Interest Rate Cut Next Week

The Federal Reserve--or at least a strong faction within it--uses the Wall Street Journal's Greg Ip to send a message that there will be no interest rate cut next week. I'm still not sure why: the only explanation that would make sense is if the Fed now believes it overreacted to the situation and cut interest rates more than it should have last fall, and I don't see the evidence for that. WSJ.com - Economy ...The Federal Reserve is concerned about the economy's recovery, but not as worried as Wall Street. So while the central bank isn't likely to cut rates next week, it still has to figure out how to acknowledge the risks without sounding either panicked or complacent.......

Posted by DeLong at 03:19 AM

August 06, 2002
EPI's Jobs Picture

The Economic Policy Institute's Jobs Picture. Every month the EPI writes up a more readable summary of the BLS's Monthly Employment Report. I blush to admit that in recent months I've been reading EPI's summary rather than the original document--thus putting me one link further from the source. This month EPI highlights our current "jobless recovery": output and production are growing, yes; but the trend of unemployment is definitely flat, or slowly rising. Economic Policy Institute August 2, 2002 Labor market stalls with no new job growth The nation’s unemployment rate remained unchanged at 5.9% last month, and payroll employment increased by only 6,000, according to today’s report from the Bureau of Labor Statistics. The job market has effectively stalled with job growth failing to meet economist’s expectations. Over the past four months the employment situation has shown no evidence of improvement, with modest gains in the service sector and continued declines in manufacturing. Unemployment rates remain low in large part due to slow growth in the labor force. Overall, today’s report indicates a weak economy struggling to find sources of growth. Demand for labor remains weak, with many key indicators all showing signs of decline last month. Involuntary part-time...

Posted by DeLong at 05:59 AM

August 01, 2002
Time to Cut Interest Rates Further?

Yet more reason that it is time to cut interest rates further... Economist.com With world stockmarkets--and political America--still reeling from a long list of corporate scandals which have destroyed some of the country's biggest companies, there seemed at least one comfort: America's economic recovery seemed strong. Now that reassurance, too, has been brushed aside. Figures issued by the government on July 31st showed that the economy grew much more slowly than expected in the second quarter of this year--by only 1.1% at an annual rate. Separately, survey data published by the Federal Reserve on the same day supported the impression of a slowing, and even faltering recovery......

Posted by DeLong at 04:57 AM

July 19, 2002
Forecasters Look at the Inventory Cycle

Richard Berner and Shital Patel of Morgan Stanley believe that the correlation between inventory changes and production changes is still high--and hence that the inventory bounce-back will be seen in this recovery, and will accelerate its pace significantly. Morgan Stanley Global Economic Forum United States: The Inventory Cycle -- Shifting into High Gear, by Richard Berner and Shital Patel (New York). ...US companies appeared to have liquidated inventories for six straight quarters, eclipsing the record set in the deep 1981-82 recession, and by most metrics stocks are exceptionally lean. In fact, inventories are so lean across a broad range of industries that production likely will play catch-up to sales for the balance of the year. As a result, even moderate demand gains will uncoil this cyclical spring, adding a percentage point to overall growth in the last three quarters of 2002 on our estimates. And rising production is the sine qua non for profits, job and thus income growth, the keys to sustaining demand in this post-bubble financial market environment. How should we judge whether inventories are lean in a Just-in-Time (JIT) world?......

Posted by DeLong at 11:22 AM

July 18, 2002
The Wall Street Journal's David Wessel Writes About Macroeconomic Vulnerabilities

For once I have next to nothing to say... :-) WSJ.com - Capital How will this change the way the economy responds to the weaponry of macro managers? Mr. DeLong identifies three factors to watch. One is a big plus. Technology is quickening the pace of growth in productivity, the amount workers produce for each hour on the job. And that, Mr. DeLong points out, will grease the wheels of the labor market. Managing a low-productivity economy (Jimmy Carter's) is a lot harder than managing a high-productivity economy (Bill Clinton's). Faster productivity growth allows faster wage growth and lower unemployment rates without inflation. It makes shifting workers from yesterday's industries to tomorrow's much easier. It is a big reason the U.S. has performed so much better than Europe. Pray that Mr. Greenspan's undiminished productivity optimism proves to be his best forecast. The other two items on the list are less comforting. Good times breed complacency even among policy makers who claim to be constant worriers. During a period of euphoria and boom, there's little attention to macroeconomic management because everything is going great. Government's capacity to make sound economic decisions degrades. Look at the long-run cost of the Bush tax...

Posted by DeLong at 09:49 AM

July 17, 2002
Forecasting Growth and Unemployment

The Federal Reserve expects average real GDP growth of 3.5% per year for the next six quarters. It projects that potential GDP will grow at about 2.75% per year. Thus the Federal Reserve expects that the gap between real GDP growth and potential GDP growth will shrink over the next six quarters. Since the unemployment rate is very closely related to the gap between potential GDP and actual GDP, this rate of growth should be enough to push unemployment down from its current 5.9% to 5.4% or so over the next eighteen months, or so the Federal Reserve expects. From my perspective this is somewhat strange. I would have expected the Federal Reserve to estimate potential GDP growth at 3.5% per year or faster over the next year and a half. I see no reason for the undershoot in the procedures the Fed uses--or should be using--to construct its estimates of potential GDP growth. Begin with the simplest possible estimate of potential GDP growth, derived from a regression analysis of the rate of real GDP growth as a function of the unemployment rate. Over the 1960-2001 period, real GDP grew at an average rate of 3.4% per year. When...

Posted by DeLong at 08:25 PM

July 16, 2002
The Production-Smoothing Model of Inventories Bites

Once upon a time economists had a model of inventories and the business cycle. The model was theoretically compelling. It was intuitive. It was easy to explain. There was one problem: the model did not work. The model was the buffer-stock production-smoothing model of inventory behavior. Its basic premise is that it is difficult and costly for individual business firms or for the economy as a whole to change its scale of operations. When you are downsizing rapidly, firing workers and mothballing capital is expensive and damaging to morale and productivity: it is much better to downsize slowly, letting worker attrition and capital depreciation do the job. When you are expanding rapidly, hiring many new workers is expensive, training them is more so, and these costs of rapid expansion are likely to be smaller than the costs and hassles of finding new locations and ordering and installing new machines: it is much better to expand gradually, so that the burden of growth does not significantly disrupt ongoing operations. These considerations led economists to hypothesize that when economy-wide demand jumped, production would jump too, but not as rapidly. There would be a time during which demand would run ahead of production,...

Posted by DeLong at 05:32 PM

July 13, 2002
Steven Roach Preaches Doom and Gloom

Morgan Stanley's Stephen Roach--one of the best we have at current analysis of the state of the business cycle--explains why he is so much more pessimistic about the future of the American economy than the typical forecaster. In brief, he sees the parallels between the U.S. today and Japan a decade ago as much stronger than the typical forecaster does (or than I do). Morgan Stanley Global Economic Forum ...most view the US macro outlook through the lens of a traditional business cycle framework. That's not unlike the approach that remains in favor back home. I guess I'm on a different planet. I continue to see the US macro through the lens of a popped asset bubble. As a result, the macro I practice these days couldn't be more dissimilar from that embraced by the broad consensus of investors, businesspeople, and policy makers. For me, the past several years have been like peeling away the layers of an onion. Once the equity bubble popped, the steady progression of subsequent events has fallen into place in a fairly logical and predictable fashion. Nasdaq, of course, was the first to go -- and, sadly, is still going. It's currently off 73% from...

Posted by DeLong at 01:20 PM

July 09, 2002
Macroeconomic Vulnerabilities in the Twenty-First Century Economy: A Preliminary Taxonomy

And the fourth of the four things I had hoped to finish by mid-May is finally put to bed. Now it's time to get back to revising Slouching Towards Utopia. "What is this fourth thing?" you ask. It's a paper for the a Council on Foreign Relations conference. It's an attempt to think coherently about how the information technology revolution is changing macroecononomic points of vulnerability: It seems to me highly likely that five sets of factors will be most important as changes in economic structure carry with them changes in points of macroeconomic vulnerability over the next one to three decades. These five sets of factors fall into two groups: first, likely changes in the magnitude of macroeconomic shocks; second, likely changes in the ability of government to act to neutralize or damp the effects of macroeconomic shocks. The likely changes in the magnitudes of shocks are two, and they work against each other: First, the faster productivity growth and the greater uncertainty associated with a leading sector-driven boom increases the likely magnitude of asset market shocks. Sectors or the aggregate market are more likely to find themselves substantially mispriced. Either waves of euphoria, or the reaction when it...

Posted by DeLong at 03:31 PM

July 07, 2002
The Economist Looks at the Bear Market of the 2000s

The magnitude of the decline in stock market values since their peak is not surprising: stock prices were substantially overvalued by historical yardsticks. (Moreover, they remain overvalued by historical yardsticks--albeit less so--today.) The important questions are two: (1) Will skillful economic management be able to keep irrational exuberance from becoming irrational depression? (2) Will skillful economic management be able to keep falling stock prices from triggering falling demand, and depression? We may well have a chance to see exactly how good at central banking the Federal Reserve is. | Economist.com | Watching Out for the Great Bear | THESE are not times for nervous investors. The recent sharp fluctuations in the world's stockmarkets have brought the doom-mongers out in force. They point to the relentless downward slide in share values since their peak in 2000 in America, earlier in London and more than a decade ago in Japan. The collapse in share prices has sent many investors scurrying for cover in safer assets like bank deposits or bricks and mortar; and workers due to retire have begun to worry about the safety of their pension funds. Stockmarket volatility has been matched by swings in currency values--if there's panic around, foreign-exchange...

Posted by DeLong at 03:12 PM

July 06, 2002
Another Forecast of a "Jobless Recovery"

Jared Bernstein of EPI also thinks we're heading for a "jobless recovery"--demand growth is too slow and productivity growth too high to generate a falling unemployment rate. I think he's more likely than not to be right, at least for the rest of this year. Jobs Picture | EPI | Since its low point of 3.9% in October 2000, unemployment has increased by two percentage points, adding 2.9 million to the jobless rolls. Since job growth has been stagnant, these job seekers have been experiencing lengthy unemployment spells. With the exception of one month following the deep recession of the early 1980s, the median number of weeks spent unemployed-11.7 in June-was the highest since such data were first collected in 1948. Long-term unemployment is a characteristic of a jobless recovery. Last month, the percentage of the unemployed looking for a job for more than six months was 19.4%, down slightly from May but 8.1 percentage points above the level in March of last year, when the recession began. During the last slow recovery in the early 1990s, the share of long-term unemployment peaked at 23.1%, seven months after the recession had officially been declared over......

Posted by DeLong at 12:08 PM

July 05, 2002
Unemployment Continues to Creep Upward

Why does the unemployment rate keep rising, if indeed we are in a recovery? First of all, we are not in that much of a recovery--demand and output are not growing that fast. Second, recall that only recently did President Bush agree to extend the duration of unemployment benefits. In the aftermath of any extension of unemployment benefit duration, the unemployment rate tends to rise by half a percentage point or so relatively to what it would have been: people take longer to search for new jobs (and on average do manage to get better jobs as a result of taking longer to search. WSJ.com - Economy WASHINGTON -- The U.S. unemployment rate edged up to 5.9% last month as employers remained reluctant to add new workers to their payrolls. The latest numbers suggest the economic recovery is too fragile to permit the Federal Reserve to raise interest rates anytime soon. The Labor Department's latest snapshot of the job market released Friday also showed that 36,000 jobs were created in June after a revised increase of 24,000 in May. But job growth wasn't strong enough to prevent the unemployment rate from rising in June from May's 5.8% rate....

Posted by DeLong at 11:24 PM

July 01, 2002
Forecasts for Continued Slow Expansion

The Wall Street Journal's Jon Hilsenrath reports on its survey of forecasters: continued growth and recovery for the next year and a half, at least. What he doesn't say is that this consensus forecast implies stationary or perhaps slightly rising rates of unemployment. WSJ.com - Major Business News | Economists Have Faith Expansion Will Continue | by John Hilsenrath ...economists have a surprisingly rosy view of the outlook for the economy in the months ahead.With nearly complete and uncharacteristic unanimity, forecasters polled by The Wall Street Journal in late June said the economy will continue to grow throughout the year and won't make a return trip into recession, a fear that has been creeping into the financial markets in recent weeks. The consensus forecast of the 55 economists who completed the survey is for real gross domestic product, the nation's broadest measure of economic health, to grow at a 3.5% annual rate in the second half of this year and at a 3.6% rate during the first half of next year, adjusted for inflation. That is slower than is typical in the early stages of an economic recovery, and far slower than the brief 6.1% growth rate recorded during the...

Posted by DeLong at 08:52 PM

June 22, 2002
Hoping That the Flaws in the American Economy Throw a Lot of People Out of Work

William Greider, writing in the Nation, hopes for a depression in the United States--for this would "deflate" the "smug triumphalism of Bush's unilateralist war policy" and be "a good thing for world affairs, since Washington couldn't run roughshod over others. He believes that such a depression could be triggered by "... financial scandals" which would lead "overseas investors... to take their money home... the declining dollar... [to] fall sharply... credit... [to] become suddenly scarce, since our debtor-nation economy relies heavily on capital borrowed from abroad, and... trigger an ugly downdraft in the U.S. economy." And then "the fashionable boastfulness about America... would implode." I don't know which is stranger: the anticipatory schadenfreude at the fantasy of U.S. unemployment climbing toward 15 percent, or the strange and ill-thought-out chain of logic by which a decline in the value of the dollar is supposed to produce a domestic depression and a shift in U.S. foreign policy. The belief that high unemployment would produce a less unilateralist and less forward foreign policy--that catastrophic "economic events" would "deflate" the "smug triumphalism" of George W. Bush's "unilateralist war policy," and produce a "Washington that couldn't run roughshod over others"--is certainly the most bizarre link in...

Posted by DeLong at 07:27 AM

June 21, 2002
Gloomy Forecasts for the World Economy, Based on Fears That the U.S. Will Be Unable to Be an Engine of Growth

For most of the past decade, world economic growth has been pulled up by high demand from the United States. Morgan Stanley's analysts are now looking forward, seeing no strong sources of demand growth outside the United States, and thinking that rapid growth in the future requires that the U.S. economy continue to buy more and more imports. But that would require a further rise in the dollar and a further expansion of the U.S. trade deficit. And they believe that international investor expectations are such that that is not in the cards. I agree with them. I cannot see the gap between U.S. imports and U.S. exports widening much further. | Morgan Stanley Global Economic Forum | ...Therein lies the dilemma for the world. Back in the crisis days of late 1998, America's current-account deficit was "only" 2.7% of GDP. While most of us thought that was high at the time, in retrospect, there was considerable scope for further expansion as the US stepped up and led the world into a glorious recovery that we dubbed "global healing." That's right, it wasn't all that long ago, that we were the out-of-consensus bulls on the global economy. But now the...

Posted by DeLong at 01:48 PM

June 20, 2002
The Federal Reserve Says Its Keeping Its Foot on the Gas

At the moment short-term real interest rates are negative: the 1.75% per year interest rate that the Federal Reserve has set on overnight federal funds is less than the rate at which consumer prices are rising. This is a very stimulative posture--it tells businesses that they should undertake investments that (in the short term at least) promise any profits at all, no matter how low. Now the Federal Reserve is telling us that there are no interest rate hikes on offer for the next few months. The Federal Reserve does not have confidence that the recovery is strong and steady enough to risk disrupting it by raising interest rates and making the incentive to invest less. The Federal Reserve does not fear rising inflation enough to want to raise interest rates to put downward pressure on price increases. | washingtonpost.com: Fed May Not Raise Rates At Least Until September | John Berry | June 20, 2002 | The Federal Reserve now appears unlikely to raise interest rates until the fall, at the earliest, because inflation remains extremely low and the U.S. economy is not growing fast enough to create many new jobs. At the beginning of the year, some investors...

Posted by DeLong at 09:10 PM

The Economist's Fears for the Strength of the U.S. Recovery

It is a strange business cycle conjuncture that the U.S. is in now. Stock prices appear overvalued, and likely to fall--an extremely unusual thing to happen at the start of the recovery. Business investment seems likely to weaken further. Yet productivity growth appears extraordinarily strong. The most likely forecast thus seems to involve (a) relatively slow growth--less than the growth rate of potential output (which is about 3.5% per year, or perhaps a touch more), coupled with (b) rising unemployment for the rest of this year at least. The Economist's gloomy take: Economist.com: ...there are good reasons for the markets' current angst. Doubts about the pace of economic recovery lie behind much of it. Wall Street is still, by any historical measure, extremely highly valued.... In so far as they ever made sense, such valuations assumed a speedy return to the extraordinarily high profit claims of the late 1990s. That assumption seems increasingly far-fetched. Mr O'Neill may not have noticed any " substantive information" recently, but others have. In particular, they fret about signals that the American consumer may be running out of steam. May's retail sales fell by an unexpectedly large 0.9%. With no evidence of a rebound in...

Posted by DeLong at 11:32 AM

June 17, 2002
Foreigners "Saturated" With U.S. Dollar Assets?: Either Way, They Need to Buy More or the Dollar Is Coming Down

Morgan Stanley seems to think that slow purchases of U.S. dollar assets by foreigners reflects not their "abandonment" of but their "saturation" by U.S. dollar assets. I don't see the difference. With a required capital inflow of $300 billion a year at current exchange rates, the current value of the dollar cannot be sustained either if foreigners abandon or if foreigners are saturated with dollar assets.

Posted by DeLong at 11:20 AM

June 14, 2002
High-Unemployment Britain Is Gone

Ever since the late 1970s--ever since Margaret Thatcher's Conservatives won their first election--Great Britain has, in my mind, been a country of high unemployment, few jobs, lots of structural labor market problems, and social decline. All that now seems to be over. Britain's structural labor market problems now are no worse than those of the United States. Financial Times UK unemployment drops to 26-year low By David Turner | Published: June 14 2002 10:32 | Last Updated: June 14 2002 10:32 The number of people in the UK who are unemployed and claiming benefit fell back to its lowest level in a generation, signalling the robust health of the economy. Figures released on Friday highlight the underlying confidence in the UK economy felt by many businesses. These companies responded to the recent short and shallow downturn by hoarding labour in the expectation of an imminent return to strong demand. Unemployment has also been kept low by strong hiring from the public sector, as the government funnels money into services to realise its ambitious plans for health, education and transport. But the figures also suggest that the labour market remains tight. Tight labour markets tend to encourage higher wage demands and...

Posted by DeLong at 06:45 AM

June 08, 2002
Yet Another Sign of Worry That Inflation Is Too Low...

If someone with as long and distinguished a monetarist pedigree as Sam Brittan is worrying that inflation rates in the industrial core are too low, then such worry has definitely become part of the conventional wisdom. A decade ago I argued that this was reason enough not to push the inflation rate below 4% per year. That argument still seems sound to me today. Inflation can be too low - Samuel Brittan : Financial Times 06/06/02 Inflation can be too low Samuel Brittan: Financial Times 06/06/02 Despite the apparent world economic upturn, excessively tight monetary targets could be dangerous if recession starts. The last International Monetary Fund World Economic Outlook contained a section entitled "Can inflation be too low?". The suggested answer was "Yes". Coming from an organisation regularly attacked as a pillar of western capitalist orthodoxy, the conclusion is pretty remarkable. It is also highly topical when so many central banks are pondering when to raise interest rates. A serious difficulty about zero inflation is that it puts a floor under how far the real rate of interest - that is, the rate corrected for inflation - can fall. In the recession of the mid-1970s, triggered by the...

Posted by DeLong at 05:19 PM

April 26, 2002
First Quarter 2002 GDP Release

In the fourth quarter of 2001 U.S. businesses shrunk their inventories by $30 billion. In the first quarter of 2001 U.S. businesses shrunk their inventories by $9 billion. This reduction in the rate at which inventories declined all by itself induced a +3.1 percentage point swing in the rate of real GDP growth between the fourth quarter of 2001 and the first quarter of 2002....

Posted by DeLong at 03:31 PM

April 17, 2002
April Industrial Production Release

At the pace of growth of the first three months of 2002, industrial production next December would be fully 6% higher than industrial production last December...

Posted by DeLong at 03:48 PM

March 29, 2002
The FOMC's January 29 Meeting

Now it is important to note that the Federal Reserve is not contemplating any form of action. There is no clear and present danger. The minutes report that the Open Market Committee was discussing "... staff background analyses..."--contingency planning for possible future events that has bubbled up to and is found intellectually interesting by the members of the Open Market Committee.* The minutes say that this discussion was a sidetrack from the Open Market Committee's business at hand: "The members agreed that the potential for such an economic and policy scenario seemed highly remote..." Nevertheless, the basic point is potentially very important, and I at least find it also very interesting. The Federal Reserve's conventional policy measures control a particular short-term interest rate--the interest rate on "Federal Funds", which are deposits in the twelve regional Federal Reserve Banks that commercial banks can use to satisfy the Federal Reserve-imposed reserve requirements. But the interest rate that matters in influencing business investment decisions is not the short-term, nominal, safe interest rate that is the Federal Funds rate, but the long-term, real, risky interest rates that businesses seeking to increase their capacity face when they try to borrow. The Federal Reserve seeks...

Posted by DeLong at 10:05 PM

March 27, 2002
The End of the 2001 Recession

Recent statistical releases on production and prices have carried two messages of note. The first was that the producer price core inflation index (that is, excluding volatile food and energy prices) was completely flat last month: zero change. There is no inflation. Over the past year, in fact, the producer price index has fallen by 2.6%. The fact that inflation is totally dead and buried even though the unemployment rate is no higher than five and a half percent is totally remarkable. Virtually no one as recently as 1995 would have believed that such a configuration of statistics was at all possible. Source: briefing.com The Federal Reserve can thus concentrate on trying to maintain full employment, without worrying about controlling inflation at all. In fact, the balance of short-run risks is that the U.S. is more likely to fall into deflation (a more dire economic disease) than to see a return of inflation. The second is that growth in industrial production has resumed. A month ago we thought that seasonally-adjusted industrial produciton was 0.1% lower in January than in December. Now we think that seasonally-adjusted industrial production was 0.6% higher in February than in December. The depth of the recession...

Posted by DeLong at 10:08 AM

March 18, 2002
Trade Deficit

Of course, were you to tell me that New York financial institutions' derivative books had a net notional principal that was long the dollar to the tune of $3 trillion, my mind would change. My mind would more than change: I would be reduced to a gibbering, nervous, fearful, insane wreck cowering beneath my desk...

Posted by DeLong at 04:12 PM

March 15, 2002
March 15 PPI Statistical Release

Today's statistical releases carried two messages of note. The first was that the producer price core inflation index (that is, excluding volatile food and energy prices) was completely flat last month: zero change. There is no inflation. Over the past year, in fact, the producer price index has fallen by 2.6%. The fact that inflation is totally dead and buried even though the unemployment rate is no higher than five and a half percent is totally remarkable. Virtually no one as recently as 1995 would have believed that such a configuration of statistics was at all possible. Source: briefing.com The Federal Reserve can thus concentrate on trying to maintain full employment, without worrying about controlling inflation at all. In fact, the balance of short-run risks is that the U.S. is more likely to fall into deflation (a more dire economic disease) than to see a return of inflation. The second is that growth in industrial production has resumed. A month ago we thought that seasonally-adjusted industrial produciton was 0.1% lower in January than in December. Now we think that seasonally-adjusted industrial production was 0.6% higher in February than in December. The depth of the recession in manufacturing remains very large,...

Posted by DeLong at 09:57 PM

February 02, 2002
Why Did the 2001 Recession Come as Such a Surprise

A historical look to understand why markets and investors get caught by booms and busts--both now and in the past. Discussion Leaders: J. Bradford Delong, Professor of Economics, University of California, Berkeley, USA Harold James, Professor, Department of History, Princeton University, USA Moderated by Betsy Stark, Business Correspondent, ABC News, USA Possible Theoretical Explanations: The Ecology of the Market: A boom is a time when there is a run of good luck--when for some extended interval things turn out better than expected. As a result, during a boom people and institutions become "trained" to be overoptimistic. When that overoptimism comes into conflict with reality at the end of a boom, individuals and institutions are highly leveraged and overextended... Different Causes: This current recession and the NASDAQ crash that proceeded it are the first time since World War II that a recession was not deliberately or semi-deliberately brought on by the Federal Reserve. Since World War II recessions have come in the United States at least when inflation is rising, and when the Federal Reserve concludes that it has to shift to reducing inflation whatever the consequences for the real economy. That's not what happened this time: the Federal Reserve was...

Posted by DeLong at 10:15 AM

November 30, 2001
Yes, We Are Semi-Officially in a Recession...

The Business-Cycle Peak of March 2001 The NBER's Business Cycle Dating Committee has determined that a peak in business activity occurred in the U.S. economy in March 2001. A peak marks the end of an expansion and the beginning of a recession. The determination of a peak date in March is thus a determination that the expansion that began in March 1991 ended in March 2001 and a recession began. The expansion lasted exactly 10 years, the longest in the NBER's chronology...

Posted by DeLong at 09:44 PM

November 23, 2001
September 11, 2001 Turned War and Politics Topsy Turvy: Its Effects on the Economy Are Less Important, But We Still Don't Know What They Will Be

The Macroeconomic Outlook for 2002 With the terror attack on the World Trade Center on September 11, 2001, winter came to the world economy. Both the direct and the indirect effects of the terror attack, coupled with the already existing sources of weakness--from the collapse of the dot-com bubble in the United States, from European interest rates too high in the interest of strengthening the new euro in the short run, from the resumption of recession in Japan--promise to make the twelve months following September 11 the worse twelve months for world economic growth since the early 1980s. We do not know how harsh this winter will be, but we do know that we are in it. However, winter will pass and spring will come. The second half of the 1990s--even with all their speculative excess--revealed that the fundamental economic benefits from the technological revolutions in data processing and data communications (and from the coming technological revolution in biotechnology) are enormous and promise a bright long-run future for the growth of the world economy. There is every reason to hope that world governments will get their macroeconomic policies right in 2002, and that starting in 2003 the world economy will...

Posted by DeLong at 09:17 PM

August 01, 1990
J. Bradford DeLong (1990), "`Liquidation' Cycles: Old-Fashioned Real Business Cycle Theory and the Great Depression" (Cambridge, MA: Harvard University Department of Economics).

J. Bradford DeLong (1990), "`Liquidation' Cycles: Old-Fashioned Real Business Cycle Theory and the Great Depression" (Cambridge, MA: Harvard University Department of Economics)....

Posted by DeLong at 03:15 PM

January 01, 1990
J. Bradford DeLong and Lawrence H. Summers (1990), "Price Level `Flexibility' and the Coming of the New Deal: A Response to Sumner," Cato Journal 9: 1 (Winter), pp. 729-735.

J. Bradford DeLong and Lawrence H. Summers (1990), "Price Level `Flexibility' and the Coming of the New Deal: A Response to Sumner," Cato Journal 9: 1 (Winter), pp. 729-735....

Posted by DeLong at 03:04 PM

December 01, 1989
J. Bradford DeLong (1989), "Review of Nicholas Spulber, Managing the American Economy from Roosevelt to Reagan," Journal of Economic History 49:3 (December), pp. 1058-1059.

J. Bradford DeLong (1989), "Review of Nicholas Spulber, Managing the American Economy from Roosevelt to Reagan," Journal of Economic History 49:3 (December), pp. 1058-1059....

Posted by DeLong at 02:59 PM

September 01, 1989
J. Bradford DeLong (1989), "Facets of Interwar Unemployment," Journal of Monetary Economics 49:3 (September), pp. 800-802.

J. Bradford DeLong (1989), "Facets of Interwar Unemployment," Journal of Monetary Economics 49:3 (September), pp. 800-802....

Posted by DeLong at 02:02 PM

J. Bradford DeLong and Lawrence H. Summers, "On the Existence and Interpretation of a `Unit Root' in U.S. Real GDP" (Cambridge, MA: Harvard University Department of Economics, 1989).

J. Bradford DeLong and Lawrence H. Summers (1989), "On the Existence and Interpretation of a `Unit Root' in U.S. Real GDP" (Cambridge, MA: Harvard University Department of Economics)....

Posted by DeLong at 01:51 PM

December 01, 1988
J. Bradford DeLong and Lawrence H. Summers (1986), "Is Increased Price Flexibility Stabilizing?" American Economic Review 76: 5 (December), pp. 1031-1044.

J. Bradford DeLong and Lawrence H. Summers (1986), "Is Increased Price Flexibility Stabilizing?" American Economic Review 76: 5 (December), pp. 1031-1044....

Posted by DeLong at 08:49 AM

September 01, 1988
J. Bradford DeLong and Lawrence H. Summers (1988), "How Does Macroeconomic Policy Matter?" Brookings Papers on Economic Activity 1988: 2 (Fall), pp. 433-480.

J. Bradford DeLong and Lawrence H. Summers (1988), "How Does Macroeconomic Policy Matter?" Brookings Papers on Economic Activity 1988: 2 (Fall), pp. 433-480....

Posted by DeLong at 11:48 AM

March 01, 1988
J. Bradford DeLong (1988), "Review of I. Berend and K. Borchardt, eds., The Impact of the Great Depression of the 1930s," Journal of Economic History 48:1 (March), pp. 239-240.

J. Bradford DeLong (1988), "Review of I. Berend and K. Borchardt, eds., The Impact of the Great Depression of the 1930s," Journal of Economic History 48:1 (March), pp. 239-240....

Posted by DeLong at 11:42 AM

July 01, 1986
J. Bradford DeLong and Lawrence H. Summers (1986), "The Changing Cyclical Variability of Economic Activity in the United States," in Robert J. Gordon, ed., The American Business Cycle: Continuity and Change (Chicago, IL: University of Chicago Press for the National Bureau of Economic Research), pp. 679-719.

J. Bradford DeLong and Lawrence H. Summers (1986), "The Changing Cyclical Variability of Economic Activity in the United States," in Robert J. Gordon, ed., The American Business Cycle: Continuity and Change (Chicago, IL: University of Chicago Press for the National Bureau of Economic Research), pp. 679-719....

Posted by DeLong at 08:11 AM

J. Bradford DeLong and Lawrence H. Summers (1986), "A Comment on John Taylor's `Improvements in Macroeconomic Stability: The Role of Wages and Prices'," in Robert J. Gordon, ed., The American Business Cycle: Continuity and Change (Chicago, IL: University of Chicago Press for the National Bureau of Economic Research), pp. 667-675.

J. Bradford DeLong and Lawrence H. Summers (1986), "A Comment on John Taylor's `Improvements in Macroeconomic Stability: The Role of Wages and Prices'," in Robert J. Gordon, ed., The American Business Cycle: Continuity and Change (Chicago, IL: University of Chicago Press for the National Bureau of Economic Research), pp. 667-675....

Posted by DeLong at 08:08 AM

J. Bradford DeLong and Lawrence H. Summers (1986), "Are Business Cycles Symmetrical?" in Robert J. Gordon, ed., The American Business Cycle: Continuity and Change (Chicago, IL: University of Chicago Press for the National Bureau of Economic Research), pp. 166-178.

J. Bradford DeLong and Lawrence H. Summers (1986), "Are Business Cycles Symmetrical?" in Robert J. Gordon, ed., The American Business Cycle: Continuity and Change (Chicago, IL: University of Chicago Press for the National Bureau of Economic Research), pp. 166-178....

Posted by DeLong at 08:04 AM