The government is expected to report this Thursday (Jan. 30) that US GDP expanded 3.1% in 2013’s fourth quarter (seasonally adjusted annual rate), according to The Capital Spectator’s revised average econometric nowcast. The projected growth rate is a bit higher than the previous 2.9% nowcast, which was published on January 3.

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Paul Krugman argues that it’s hard to tell the difference between the economies of the UK and France these days. He seems to be cherry-picking the numbers to make a point about the value (or the lack thereof) for austerity policies (the UK favors it, France less so). That’s an important discussion, but before you can have a productive debate it’s essential to look at the numbers clearly. Krugman cites GDP data across the past several years, but this isn’t very convincing for arguing that the nations are one and the same when it comes to macro trends of late. When you move closer to the recently published numbers, a different perspective emerges.

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As you can see, The Capital Spectator has a new web site. I’ll be tweaking the design in the days to come, but at the moment the primary migration to WordPress from Movable Type is complete. The seamless switch, by the way, is due to Ryan Kessen, an IT consultant par excellence who’s an authority on all things related to WordPress, web design, and a whole lot more in the land of computers and the web. Ryan managed the transition, delivering a smooth and efficient conversion to WP. If you’re in the market for an informed resource on such matters, Ryan’s my first recommendation. For more information, take a look at his web site at: www.ryankessen.com

The Capital Spectator will be migrating to a new blogging platform (WordPress) over the next day or so, which means that all the usual caveats are lurking with regards to glitches and strange things that go bump in the digital night. This seems like a good time to take a short break from the usual routine as I do battle with the tech gods and Old Man Winter. It’s back to the numbers on Monday, January 27.

The three-month average of the Chicago Fed National Activity Index (CFNAI) is expected to decline slightly to +0.22 in tomorrow’s update for December, according to The Capital Spectator’s median econometric forecast. In the previous release for November, the three-month average was +0.25. Values below -0.70 indicate an “increasing likelihood” that a recession has started, according to guidelines from the Chicago Fed. Based on today’s estimate, CFNAI’s three-month average is projected to remain at a level that’s historically associated with economic expansion–at a rate that’s slightly above trend (as indicated by a positive value).
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Forecasting has a battered reputation in finance and economics, and for all the obvious reasons. But that doesn’t change the simple fact that you just can’t avoid prediction when it comes to macro and markets. Thinking otherwise is delusional. Investing is inherently an act of forecasting. The only reason to buy (or sell) an asset: the presumption that the price will rise (fall) at some point in the future. That leaves us to ponder why prices might rise or fall. A reasonable place to start: the business cycle. In any case, you’ll need a model of one form or another to develop some intuition for another question: Will prices rise or fall (or will the state of macro change)? There are lots of models to choose from, but the challenge is interpreting the raw data. That’s where a probit regression (or its close cousin: logit regression) can help.
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Bonds have been widely scorned on the assumption that interest rates are set to rise for an extended period. Fair enough, but the world of fixed-income pulls in a lot of territory and so it’s a mistake to lump all corners of the planet’s bond markets into one lumpy blob.
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The economic news of late has been a bit wobbly—the surprisingly weak pace of jobs growth in December, in particular. But letting the tail end of a handful of numbers (that may or may not be revised) is a dangerous game for drawing strategic conclusions about the overall state of the economy. On that note, let’s move a bit closer to the realm of robust analytics and note that there are still no convincing signs of trouble for the business cycle when we look at the broad macro trend across a diversified set of 14 economic and financial indicators.
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● The Dollar Trap: How the U.S. Dollar Tightened Its Grip on Global Finance
By Eswar S. Prasad
Summary via publisher, Princeton University Press
The U.S. dollar’s dominance seems under threat. The near collapse of the U.S. financial system in 2008-2009, political paralysis that has blocked effective policymaking, and emerging competitors such as the Chinese renminbi have heightened speculation about the dollar’s looming displacement as the main reserve currency. Yet, as The Dollar Trap powerfully argues, the financial crisis, a dysfunctional international monetary system, and U.S. policies have paradoxically strengthened the dollar’s importance.
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Today’s update on housing starts and new building permits is wobbly while data on industrial output looks mildly encouraging. It’s going to take time to figure out which side of this macro coin is the genuine article, but in the meantime let’s zero in on the key trends as a starting point for guesstimating how the broad trend is unfolding.
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