A Long, Strange Season For Macro Analysis

Analyzing the business cycle in real time is a task that’s always threatening to lead us astray, but in the current climate the hazard may go into overdrive. All the usual gremlins are with us, but there are additional complicating factors to consider these days, including: the uncertainty and high-stakes poker of the fiscal cliff negotiations in Washington; a recession in Europe that coincides with a (dormant?) fiscal crisis on the Continent; and deciding how, or if, Hurricane Sandy’s lingering effects are distorting the incoming data.


Consider yesterday’s auto sales news for November, which rose sharply to the highest annual rate in nearly five years. Is that a sign that the U.S. economy is chugging along? Or is the demand surge a one-time response to the hurricane, which unexpectedly cut short the working lives of thousands of autos in one fell swoop.
“Vehicle sales are one of the encouraging spots of our economy,” notes Gary Bradshaw of Hodges Capital Management. But will the party last? That depends on how much of the demand surge is storm related. “November was a very good month, but December has the potential to be even better,” predicts Jesse Toprak, chief analyst for TrueCar.com.
Consider, too, the conflicting news on manufacturing for November. As I noted yesterday, the ISM Manufacturing Index delivered a warning to optimists with a below-50 reading, a signal that economic activity in the sector is contracting, albeit only slightly. But a rival benchmark from Markit Economics tells us that growth in the manufacturing sector strengthened last month.
Separating the legitimate signals from the anomalous ones is always a challenge, and it’s not going to get any easier in the months ahead. I expect that we’re going to see an unusually wide range of numbers as the economic updates roll in through the end of the year and into January. Prepare yourself for equally dramatic forecasts that purport to know what it all means with absolute certainty.
Don’t misunderstand: There’s plenty to worry about. But the numbers aren’t uniformly awful, at least not yet. Meantime, there’s another large uncertainty that may bring relief. Imagine that the fiscal follies in Washington ends and a reasonable deal is engineered. Would that unleash a wave of positive sentiment across America? Would it translate into a new round of positive economic momentum? Or is that merely wishful thinking? Again, hard to say until—if?—we see the details of any deal.
Expectations for the U.S. economy seem to be quite low—again. But we are in a strange period with little precedent. There’s still only one solution: study a broad data set to make informed decisions. That’s a terrible way to evaluate the economy… except when compared to the alternatives.

2 Responses to A Long, Strange Season For Macro Analysis

  1. Michael McGillicuddy says:

    Hello JP,
    My name is Mike McGillicuddy and I am a student at the University of Connecticut. I am posting this comment for one of my classes called Money and Banking. I enjoyed your article, and would like to give my thoughts and comments on it. I enjoyed your article, and I think that it goes over a number of important issues that will have major implications on the U.S. economy. You discuss the current status of the “cycle” that the U.S. is currently in. In my opinion, we are not in a normal business cycle. While business cycles and recessions are staples of any economy, I believe that we are currently in a situation that will not be resolved anytime soon. I believe that there have been structural changes to the way that the U.S. will be able to operate and prosper in the future.
    From a macroeconomic perspective, the U.S. going forward will be burdened by a massive amount of debt. This debt has been building up for decades and will be passed onto future generations. On top of that, we have bubbles that have yet to burst. While we have seen the real estate and the consumer discretionary spending bubbles burst, there is still the government debt bubble as well as you could argue possibly the dollar bubble that has not burst yet.
    If we look at the financial markets since the crisis, it may look like there has been a fair amount of growth and even a rally at times for example in the stock market. But fundamentally, what is driving that growth? If you look at the correlation between stock market gains and the Federal Reserve’s QE program, it is quite stunning. A great deal of gains in the financial markets has come after Fed announcements regarding printing money. At the moment, the U.S. is dramatically increasing the money supply through open market operations. It seems as though there are many individuals who are overlooking this fact. Why is the sentiment that inflation is not a danger? Doesn’t that go against economic logic? In my opinion, even if there is a deal regarding the Fiscal Cliff, that does not mean for a second that the U.S. will move forward in regards to economic growth.
    I believe that the U.S. is just as likely to fall back into a recession once the effects of inflation are felt. It is inevitable that there will be some consequences in the future due to our debt burden and fiscal irresponsibility. That is why I do not see this situation as just another business cycle and natural recession. The Federal Reserve is artificially propping up the stock market, as well as the economy through printing money. The idea is that short-term fixes will produce short-term economic gains. But long term, there are serious fundamental issues that lie in wait and the U.S. would need to see fairly extreme economic growth to balance the extreme burdens that are upon it.

  2. Andrew Froncillo says:

    Jp,
    In such a sluggish and unsure market, Americans are eager to analyze recent data in hopes of finding some certainty in the economy (especially with positive implications). Unfortunately, the economic data and analyses in which they are turning to for guidance are misleading. The indicators that you cited, like the auto sales and ISM Manufacturing Index, are most likely exhibiting temporary fluctuations. While there may be parts of the economy that are showing recent increases in activity, it is not enough for people to start making inferences of significant economic stimulation and growth, and there may be extenuating factors (like Hurricane Sandy) that may explain these jumps.
    In the 3rd Quarter GDP print that was recently released, there were again positive signs for the economy that were seen. Mirroring the small surges of growth throughout many parts the economy, the GDP report looked good, or at least better than it has been since the start of the economic stagnation. However, this growth is not nearly substantial enough to stimulate the economy to the point that it removes itself from the shadow of the fiscal cliff, the European debt crisis, and the deteriorating global market as a whole. It is a long way from re-establishing a prosperous, self-perpetuating economy.
    Unfortunately, the economy is ultimately at a standstill, dwindling away in an inactive economy with few traces of profit growth, and will remain there until there are changes made. At the end of this year, the “Fiscal Follies” will have ended, resulting in a new (hopefully beneficial) deal, in which the economy will have the chance to regain some success. Until then, however, investors and businesses are going to remain in a state of uncertainty, studying the endless stream of economic updates, which you and I both envision to be coming in in the approaching months.
    Regards,
    Andrew Froncillo

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