Whenever I update The Capital Spectator Economic Trend Index (CS-ETI), as I did last week, someone usually asks how to interpret the data. In particular, how should we translate CS-ETI’s raw numbers into probabilities for estimating recession risk? One solution is looking at the data through the filter of what’s known as a probit model.
Strategic Briefing | 10.2.12 | Fiscal Cliff Risk Analysis–Oct Edition
Leaders at Work on Plan to Avert Mandatory Cuts
The New York Times | Oct 1
Senate leaders are closing in on a path for dealing with the “fiscal cliff” facing the country in January, opting to try to use a postelection session of Congress to reach agreement on a comprehensive deficit reduction deal rather than a short-term solution.
September Manufacturing Activity Revives After 3 Sluggish Months
Manufacturing activity modestly rebounded in September, the Institute for Supply Management reports. Today’s update of the organization’s widely followed ISM Manufacturing PMI Index reveals that “economic activity in the manufacturing sector expanded in September following three consecutive months of slight contraction.” The index rose to 51.5 last month, up from 49.6 in August. A reading above 50 equates with economic expansion. Overall, it’s a relatively upbeat report and one that surprised many economists.
Major Asset Classes | September 2012 | Performance Review
The capital and commodity markets in general enter the third quarter on a strong note. Nearly all of the major asset classes posted gains in September and everything is comfortably in the black for the year through the end of the third quarter. Looking backward suggests that all’s well. But rearview mirrors can be misleading at times if momentum is set to give way to mean reversion. .
Q3:2012 U.S. GDP Forecast Update | 9.30.2012
Starting with today’s update of looking ahead to the next quarter’s GDP, I’ll present several forecasts drawn from different methodologies for contrast and comparison on a regular basis. With that in mind, let’s consider how several forecasts for third-quarter U.S. GDP stack up.
Book Bits | 9.29.2012
● The Signal and the Noise: Why So Many Predictions Fail–But Some Don’t
By Nate SIlver
Review by Burton Malkiel via The Wall Street Journal
It is almost a parlor game, especially as elections approach—not only the little matter of who will win but also: by how much? For Nate Silver, however, prediction is more than a game. It is a science, or something like a science anyway. Mr. Silver is a well-known forecaster and the founder of the New York Times political blog FiveThirtyEight.com, which accurately predicted the outcome of the last presidential election. Before he was a Times blogger, he was known as a careful analyst of (often widely unreliable) public-opinion polls and, not least, as the man who hit upon an innovative system for forecasting the performance of Major League Baseball players. In “The Signal and the Noise,” he takes the reader on a whirlwind tour of the success and failure of predictions in a wide variety of fields and offers advice about how we might all improve our forecasting skill.
U.S. Economic Trend Update | 9.28.12
With a full set of July indicators in hand, along with a nearly complete set of August numbers, the data is telling us that the economic trend has weakened. But the decline in the trend is nowhere near the danger zone for recession risk. Nonetheless, the 3-month moving average of the Capital Spectator Economic Trend Index (CS-ETI) has dropped modestly for each of the three months through August and so the potential for trouble down the road can’t be ignored in the current slow-growth climate.
Spending & Income Increased In August
Personal income and spending rose in August, the U.S. Bureau of Economic Analysis reports, although the increase on the income side of the ledger was sluggish in nominal terms (and actually fell last month after adjusting for inflation). Personal consumption expenditures, on the other hand, had a much stronger month, rising the most since February. Some of the higher spending was due to rising gasoline prices. Nonetheless, consumers were willing to spend more on durable goods, which suggests that there’s still some capacity to open the wallet for discretionary items. Overall, today’s income and spending numbers suggest that the economy still has forward momentum. If you’re looking for a clear sign that a recession is near (or recently started), you won’t find it here.
Contradiction Du Jour: Durable Goods Orders vs. Jobless Claims
There’s good news and bad news in today’s economic reports. In the labor market, initial jobless claims dropped a hefty 26,000 last week—the biggest weekly decline since July—to a seasonally adjusted 359,000. That leaves new filings for unemployment benefits close to the post-recession low of 352,000 from the week ending July 7. But this encouraging news is marred by a steep drop in durable goods order for August. Does one data set trump the other? That’s to be determined in the weeks ahead as more numbers roll in. Meantime, there are two newly minted data points to consider, each one contradicting the other in rather stark terms. The macro truth will out, and probably quite soon. Meantime, today’s menu of statistics offer a choice: darkness or light.
The New Abnormal Is Back (Actually, It Never Left)
Surprise, surprise—stocks and inflation expectations are down. Together. Again. Surprised? You shouldn’t be. This abnormal relationship has prevailed for most of the past four years, from roughly that period of economic infamy when a certain investment bank was allowed to collapse and the linkage between markets and macro has been skewed ever since. I call this the new abnormal—the unusually high positive correlation between changes in the stock market and inflation expectations, as defined by the 10-year Treasury’s yield less its inflation-indexed counterpart. Whatever you call it, it’s still with us, and it’s a sign that the crowd still craves higher inflation. That’s likely to prevail until something approximating “normal” returns to the economic landscape. Meantime, the new abnormal rolls on.