Predicting recessions, especially future ones, is a challenging task. A case in point is the Federal Reserve officials who participated in the January 2006 FOMC meeting to discuss the economic outlook. Recently disclosed transcripts from this meeting have sparked considerable debate regarding the Fed’s ability— or lack thereof— to foresee significant macroeconomic changes. The verdict from commentators is largely unfavorable, with many expressing disappointment (see news reports here and here, for example). Derek Thompson of The Atlantic describes the transcript as “damning,” highlighting the officials’ “blithe ignorance in the face of impending doom.”
There are two ways to interpret today’s economic updates concerning weekly jobless claims and December retail sales. For those anticipating a recession— a viewpoint that resonates with some analysts— the latest statistics provide slight reinforcement for forecasting challenges ahead. However, these new reports aren’t particularly transformative, leaving room for a moderately optimistic outlook to remain valid.
The “Austerity Myth”: Gain without Pain?
Roberto Perotti (University of Bocconi) | November 2011
As governments worldwide deliberate over cutting budget deficits, the “expansionary fiscal consolidation hypothesis” has resurfaced. I caution that this hypothesis, particularly regarding the short run, should be approached with skepticism. Alesina and Perotti (1995) and Alesina and Ardagna (2010) present arguments indicating that fiscal consolidations can be expansionary, particularly when achieved through government spending cuts. However, the IMF (2010) criticizes the data and methodologies employed by AAP and draws contrasting conclusions. Due to the multi-year duration of substantial fiscal consolidations— which are often the most informative— relying solely on yearly fiscal policy panel data is too restrictive. I present four detailed case studies: Denmark and Ireland, executed under fixed exchange rates (most relevant for many Eurozone nations today), and Finland and Sweden post-currency float. All four instances saw economic expansion; however, in Denmark, internal demand alone was the catalyst for growth. Ultimately, a long slump followed as the economy lost its competitiveness. For the others, growth was primarily export-driven for an extended period, particularly in Ireland due to an appreciating sterling. In Finland and Sweden, significant currency depreciation occurred following their flotation. Additionally, interest rates plummeted quickly, with wage moderation playing a crucial role in enhancing competitiveness and reducing interest rates. This wage moderation was encouraged by direct government involvement in wage negotiations. The adoption of inflation targeting during consolidations in Finland and Sweden also aided in decreasing interest rates. These findings cast doubt on some interpretations of the expansionary fiscal consolidation hypothesis and its relevance to many nations’ current situations. Notably, an inability to devalue exists among EMU members today (except in relation to non-Eurozone nations). A net export boom is unattainable globally, and further declines in interest rates appear unlikely. Moreover, policies addressing incomes are currently unpopular; evidence from international experiences, particularly Denmark’s case, indicates their ineffectiveness after several years.
One area of the economy that raises significant concerns is the recent trend in disposable personal income (DPI). As I mentioned last month in relation to the November data update, the declining annual growth rate is increasingly worrisome.
While the economy seems to be recovering, the ongoing debate regarding recession risks in 2012 persists. Although the labor market appears to be improving, this alone is not enough— at least not yet— to convince some analysts that the threat has dissipated.
Are investors acting irrationally or merely exercising caution when deciding on fundamental stock/bond asset allocations? This question has gained prominence, especially following MarketWatch’s Jonathan Burton’s article addressing “Why stocks will beat bonds over the next 20 years.” The article outlines the familiar trend: bonds have outperformed in recent years, while stocks have lagged. For instance, over the past five years, the stock market (Russell 3000) has remained stagnant, whereas bonds (Barclays Aggregate Bond) have appreciated at an annualized rate of 6.5% through 2011 (for a summary of recent returns, see my latest update on major asset classes). Assuming a tendency for mean reversion, the outlook for equities appears positive, while the projected returns for bonds seem relatively mediocre, if not negative.
● American Gridlock: Why the Right and Left Are Both Wrong – Commonsense 101 Solutions to the Economic Crises
By H. Woody Brock
Summary via publisher, Wiley
Pessimism is pervasive across the Western world as pressing issues like massive debt, high unemployment, and sluggish economic growth pit the population against each other in political disputes. Right and left factions often overlook each other’s viewpoints, failing to acknowledge any valuable ideas from the opposition. In American Gridlock, economist and political theorist H. Woody Brock bridges this divide, presenting a clear path from our economic crisis. Using logical and principled arguments, Brock demonstrates that the solution lies not in choosing between free-market capitalism and a government-driven economy. Instead, it’s essential to enact constructive policies that promote “true” capitalism while incorporating social measures for those in genuine need.
Private payrolls experienced a net increase of 212,000 in December, while the overall unemployment rate dropped to 8.5%, its lowest level in almost three years, as reported by the Labor Department here. However, the monthly job creation pace is a bit disappointing, especially following the remarkable growth reported by ADP’s estimate just yesterday. Yet, today’s report remains respectable considering the current economic context. Indeed, adding 212,000 jobs is commendable when compared to November’s more modest addition of 120,000. At the very least, these figures increase the pressure on those speculating about a forthcoming recession.
The Labor Department is about to release its December payrolls report shortly with high expectations for a strong figure. Following the robust update from ADP on jobs created in the private sector last month, the outlook has been further bolstered. The consensus forecast for today’s private job creation is projected at +170,000, according to Briefing.com. Additionally, a simple linear regression model applied to historical data from ADP and the Labor Department’s private payrolls since 2000 suggests that today’s report could show an increase of 249,000 jobs. However, it is essential to view statistical models with caution, of course. As for the actual figure, we await today’s update…
Princeton University’s Burton Malkiel forecasts that “U.S. stocks should yield returns of approximately 7%, five percentage points higher than secure bond yields” in the long-term future. In a piece published in today’s Wall Street Journal, the author of the bestselling A Random Walk Down Wall Street
