The missing economic reports due to the government shutdown will start arriving this week and beyond, beginning with tomorrow’s employment report for September. Meanwhile, let’s consider what the available numbers tell us about the state of the US business cycle. Based on the latest data, economic risk remains low through last month. This profile comes with an unusual caveat, of course: several key indicators are still MIA. At this point in the month we should have already seen September numbers on payrolls, retail sales, industrial production, and new housing starts. Those updates are coming, but for now we’re clueless. Nonetheless, let’s kick the macro tires for an update look at the trend, albeit one that’s impaired by limited data.
Book Bits | 10.19.13
● The Confidence Trap: A History of Democracy in Crisis from World War I to the Present
By David Runciman
Summary via publisher, Princeton University Press
Why do democracies keep lurching from success to failure? The current financial crisis is just the latest example of how things continue to go wrong, just when it looked like they were going right. In this wide-ranging, original, and compelling book, David Runciman tells the story of modern democracy through the history of moments of crisis, from the First World War to the economic crash of 2008.
A global history with a special focus on the United States, The Confidence Trap examines how democracy survived threats ranging from the Great Depression to the Cuban missile crisis, and from Watergate to the collapse of Lehman Brothers. It also looks at the confusion and uncertainty created by unexpected victories, from the defeat of German autocracy in 1918 to the defeat of communism in 1989. Throughout, the book pays close attention to the politicians and thinkers who grappled with these crises: from Woodrow Wilson, Nehru, and Adenauer to Fukuyama and Obama.
Chicago Fed Nat’l Activity Index: September 2013 Preview
Monday’s update of the Chicago Fed National Activity Index (CFNAI) has been postponed due to the recent government shutdown. When the data is released, September’s three-month CFNAI average is expected to rise slightly to -0.14, according to The Capital Spectator’s average econometric forecast. (The four underlying models for this projection, by the way, use data through August and so the government shutdown that delayed publication of September economic data doesn’t currently affect the CFNAI projections. For details on the models, see the summaries below.) In the previous release for August, the three-month average was reported as -0.18. 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, albeit at a below-trend rate.
Here Comes The Data…
Now that the government has re-opened and the insanity has passed (at least until early next year, when the budget debate begins anew), it’s time to begin climbing out of the data hole. That includes publishing the missing employment report for September, which has been rescheduled for release next Tuesday, Oct. 22, according to the Bureau of Labor Statistics.
A Small But Positive Bit Of Progress In Jobless Claims
The jobless claims data is still choking on the backlog blowback, or so it seems based on today’s weekly update on new filings for unemployment benefits. The modest dip in claims for the week through October 12—down 15,000 to a seasonally adjusted 358,000—is a step in the right direction after the previous surge skyward, which is also attributed to the after-effect of computer glitches. But the latest slide falls well short of convincing evidence that the trend is headed lower once more.
Macro-Markets Risk Index: 10.4% | 10.17.2013
The shutdown showdown is over, the government has re-opened, and the imminent threat of a Treasury default has been averted. Now the damage assessment can begin in earnest. Estimating the economic price tag for the fiscal war in Congress will take time, a process that will be hampered due to the missing updates on key economic indicators that became victims of the political stalemate in Washington. It’s unclear if these numbers, including September’s retail sales, will be published anytime soon, if at all. Meantime, let’s take a fresh look at what we do know via the latest macro profile based on market data. For the moment, a slight rebound appears to be underway. The Macro-Markets Risk Index (MMRI) closed yesterday, October 16, at 10.4%–a level that suggests that business cycle risk remains low. Yesterday’s close is MMRI’s highest reading since mid-September. If MMRI falls under 0%, that would be a sign that recession risk is elevated. By comparison, readings above 0% imply a bias for economic growth.
US Industrial Production: September 2013 Preview
Tomorrow’s US industrial production report for September will be postponed due to the government shutdown. Although the numbers are produced by the Federal Reserve, which remains operational thanks to funding that’s independent of Congressional approval, the central bank advises that this report relies on “a range of data from other government agencies, the publication of which has been delayed as a result of the federal government shutdown.” When (or if) September’s report sees the light of day is unclear at this point. That said, industrial production for September is expected to rise 0.2% over the previous month, according to The Capital Spectator’s average econometric forecast. Keep in mind that this forecast is impaired because it doesn’t reflect updates to the R-4 and VAR-7 models (see definitions below), which rely in part on the latest payrolls data. Unfortunately, the September employment report from the government is still a mystery due to the budget impasse in Congress. Using the available numbers, the Capital Spectator’s average forecast of a 0.2% rise for September industrial production represents a lesser pace from the previously reported 0.4% gain for August. Meanwhile, the Capital Spectator’s average projection for September is below several consensus forecasts based on recent surveys of economists.
US Housing Starts: September 2013 Preview
Tomorrow’s report on US housing starts for September will likely be postponed due to the government shutdown. When (if?) this update is published, US housing starts are expected to total 891,000 (seasonally adjusted annual rate), according to The Capital Spectator’s average econometric forecast. The projection represents a modest decline vs. the previously reported 891,000 total for August. Meanwhile, in contrast with The Capital Spectator’s average prediction, several consensus forecasts drawn from surveys of economists anticipate a moderate rise in September housing starts vs. the previous month.
Looking For Value… In Price Signals?
Recognizing value as a risk factor of significance is firmly established in the academic literature and it’s widely applied in the real world of money management. It’s not hard to understand why. Buying assets on the cheap has an encouraging history of delivering the performance goods, and there’s quite a lot of theoretical support for explaining why that’s so. The problem, of course, is that deciding if a given asset or asset class is priced at a discount is tricky in real time. One reason is because the traditional metrics of choice for estimating value—book value, earnings, and other accounting measures—are reported with a considerable time lag. Even worse, some asset classes (i.e., commodities) can’t be valued properly, if at all, by the cash-flow standards that apply to stocks, bonds and real estate. Value investing, in other words, requires a fair amount of time and effort. But in a bid to generate real-time value signals that can supplement the traditional methods, a recent paper offers an intriguing idea: look to Mr. Market’s price signals for guidance.
Just Gimmie Some (Fiscal) Truth
James Hamilton, a dismal scientist who teaches the dark art at University of California, San Diego, cuts through the noise and lays out the unvarnished truth on the needlessly convoluted and confused subject of red ink and spending in Washington:
Problem 1 is that the debt-ceiling vote has always been, and always will be, a political charade. The real decision is how much the government is going to spend on programs and how much it is going to collect in taxes. Once Congress has made those two decisions, if spending exceeds taxes, of course the government needs to borrow more. The idea of holding a separate vote on borrowing, as if it was a separate decision from spending and taxing, serves only one purpose — allow representatives from the minority party to grandstand as if they were actually doing something about the deficit.