When a blip denotes “strength”!

The “reasoning from a price change” mistake # 5432

Diane Swonk ‏@DianeSwonk  2h2 hours ago

Core retail sales strong as saving at gas pump fueled some eating out and drinking and holiday purchases at sporting goods stores

As the chart shows, that doesn´t sound right! Otherwise, retail sales growth, core or otherwise, should have climbed a lot over the past year!

Diane Swonk_1

What´s really going on is that AD growth is faltering.

Diane Swonk_2

Reasoning from a price change will set you on the wrong path!

According to the WSJ´s Boost From Oil-Price Drop Is Elusive:

When oil and gasoline prices began to tumble in mid-2014, experts widely expected it would jolt spending by U.S. consumers and businesses. It hasn’t turned out that way.

Instead, the pace of business investment has slowed significantly, due to drags from weak commodity prices, a strong dollar and concern about the global economy. Consumer spending, meanwhile, has been uneven, with car and home sales up, but inflation-adjusted spending at retailers sluggish since the middle of this year.

Now, oil and commodity prices are showing still more weakness, with wide ramifications to U.S. industry and the Federal Reserve.

Just an example of the gross error: Fourteen months ago, the Economist´s Buttonwood wrote “Blessing in Disguise”:

WHEN Winston Churchill, having led Britain to victory in the second world war, was defeated in the 1945 general election, his wife Clementine remarked that it might be “a blessing in disguise”. If so, the great man replied grumpily, it was “very well disguised.”

Could the same be true of yesterday’s market sell-off? Some investors were arguing the case yesterday. Eric Lonergan of M&G, an investment firm, tweeted that

Falling yields and oil price (are) far more of a stimulus than recent data is negative. Expect growth momentum to improve.

Certainly, lower oil prices are a tax cut for western consumers. Although, of course, the result is an income loss for oil producers, the marginal propensity to consume of consumers (as it were) is higher and this helps demand.  Rising oil prices have been a harbinger of recession, whether in 1973-1974, 1979-1980 or 2007. Lower government bond yields are a help, to the extent that they also bring down corporate borrowing costs.

Isn´t it confusing? Oil prices fell largely because oil demand fell due to contracting economic activity. So it´s not at all like a tax cut! In the 2000s, prior to 2008, oil (and commodity) prices were rising AND the world economy was booming. Is that like a tax hike or reflects greater oil demand?

In the 1970s, oil prices were rising because oil supply was constrained. That felt like a tax increase, so economic activity contracted.

Falling yields were also a reflection of falling NGDP growth expectations, and therefore cannot be a source of improvement in “growth momentum”!

Circular logic gets you nowhere! Maybe only to a misguided rate hike!

Has Stan Fischer gone gaga?

After so many years as a top-notch academic in addition to a stint as head honcho at the Bank of Israel, how come he still reasons from a price change?:

A strong dollar is restraining U.S. inflation and exports, justifying a slower pace of interest-rate increases, but on balance the U.S. economy is riding out the effects fairly well, Federal Reserve Vice Chairman Stanley Fischer said Thursday.

He can´t see below the surface and misses the fact that the strengthening dollar (and low inflation) is a consequence of the tight policy his ‘bank’ has adopted!

Or, it could be smart blame shifting, as in “In spite of that the ‘bank’ has done quite well”!

Fischer Gaga

HT Dajeeps

Thirty years and counting, but reasoning doesn´t change!

Maybe this “analytical calamity” comes from “price and quantity-based” reasoning.

In 1984 Alan Reynolds wrote “Mainstream Voodoo Revisited”:

The quality of public debate on economic issues is rapidly degenerating to the level of intellectual barbarism. Contradiction has become the mark of sophistication, evidence is dismissed as irrelevant, and “experts” are defined as anyone who advised the government during some economic catastrophe. Indolent journalists lean on an imaginary consensus, claiming that “most economists agree” about this or “Wall Street worries” about that.

Most economists are said to be concerned that a growing economy must raise interest rates, which will prevent the economy from growing. The solution, it seems, is for the Fed to raise interest rates to slow the economy, so that interest rates can fall and thus speed up economic growth…

And concludes

Economic policy has never before been so thoroughly dominated by ever-changing economic theories and forecasts. Economists who can’t predict the next month now propose to fine-tune the 1989 budget or the 1986 inflation rate. There is a panicky political impulse to fix things that are not broken and ruin things that were almost fixed. Always, the rationale is that “most economists agree” that “something” must be done. If economists were actually guilty of believing half of the strange ideas that are attributed to them, it would be safer to base economic policy on astrology.

Reasoning from a price change at the Fed is endemic!

Reuven Glick, is a group vice president at the Federal Reserve Bank of San Francisco. He stated his views here:

Reuven Glick_1

Inflation, as measured by the change in the personal consumption expenditures (PCE) price index, was 0.3% in the 12 months through August. Very low overall inflation is largely attributable to lower prices of energy goods and services, which have fallen by over 16% in the past year. Excluding energy as well as the typically volatile food component of spending, core PCE rose 1.3% over the past 12 months. Inflation has remained below the Federal Open Market Committee’s 2% target since mid-2012. Absent further declines in energy prices or a further strengthening of the U.S. dollar, we expect that stable inflation expectations and diminishing slack will push core and overall PCE inflation up gradually towards 2%.

And goes into finer detail:

Reuven Glick_2

In recent years, core services inflation has tended to be positive, except during the recession and the early recovery. Core goods inflation has tended to be negative, with brief exceptions around 2009–10 because of tobacco tax hikes and 2011–12 because of rising textile and apparel costs. In recent months both core goods and services inflation have slowed, that is, services inflation has been less positive and goods inflation has been more negative.

The decline in core goods inflation can be attributed to declining import costs associated with the appreciating value of the dollar as well as lower costs abroad. Because goods account for most international trade, movements in exchange rates and foreign prices tend to exert more pressure on goods prices than on service prices. Lower prices of imported consumption goods directly affect core goods inflation. They also affect goods prices indirectly through imports of raw materials, such as metals, plastic, and rubber, used in the U.S. production of goods for domestic consumers.

Core service inflation has been pulled down by more subdued increases in health-care service costs, which represent a quarter of core services spending and 19% of overall core spending. Health-care services inflation has been slowing for several years and fell off sharply in 2014, primarily from capping of increases in Medicare payments to physicians.

And gets rid of “inconvenient” items:

Reuven Glick_3

The impact of import, energy, and health-care costs on core inflation can be gauged by “what-if” exercises that remove these sectors from the calculation. Excluding relatively import-intensive (for example, apparel and other nondurables) and energy-intensive (for example, transportation) sectors would raise core inflation modestly, by around 0.2%. Removing health-care services spending from the calculations would raise core inflation by an additional 0.3%.

Is he a monetary analyst that contributes to monetary policymaking or a “spreadsheet analyst” that contributes nothing to monetary policymaking?

It seems that it never crossed his mind that inflation is low, and even falling, because monetary policy has been tight, or even tightening!

He never noticed, for example, that headline inflation was dropping long before oil prices tumbled!

Reuven Glick_4