On the Woes of Navigating in Real Time
Dr. David Altig at Macroblog has a wonderful post on the woes of making economic policy in real time.
In these pages, we have been banging on the drum that the econometrics used as "a compass" to steer economic decisions have inherent inaccuracies and latencies.
This causes the government agencies that use them to more often than not, under or over shoot their intended targets.
There is a definite pattern in the 1998-1999 data which leads up to the 2000 collapse.
Although in hindsight which is 20/20, the Fed may not have seen the pattern in which some indicators started to wave red flags as early as 1998 and as late as Q4 1999, which in the case of the latter, was way too late.
To be sure, navigating in real time with a rusty depolarized compass is no picnic. Here are some things to look for in the 1998-1999 data graph.
1. 1998 -1999 PCE a public spending head fake - look for a 3 month or greater spike in durable goods and overall PCE, coupled with a drastic YOY drop in durable goods during that same time period. (We explain the spike in current durable vs the YOY drop in durable later)
Durable goods and YOY drop tell you this is "happy daze" or joy spending, big ticket items are not on the menu, because times are tough.
2. 1998-1999 Gross Private Domestic Investment - Fixed Investment, Nonresidential & Equipment/Software: look for a 3 month or greater drop along with a drastic YOY drop during the same period.
John Q. Public is "soft" spending, corporations and investors are pulling in their horns.
3. 1998-1999 Government Consumption Expenditures - Federal and Defense: look for a 3 month or greater drop along with a drastic YOY drop during the same period.
Not only are the private sector not spending, neither is the government, John Q is left to dangle in the wind all alone.
4. 1998-1999 GDP - look for a 3 month or greater drop along with a drastic YOY drop during the same period.
This drop should occur after a quarterly spike to the upside (head fake), and is symptomatic of what happens after the head fake to a one legged animal who is hopping along on "joy" spending.
5. 1998-1999 Imports/Exports: look for a 3 month or greater increase of imports combined with a decrease of exports during the same period.
As plants close and layoffs occur, domestic production contracts forcing a decrease in exports and an increase of imports.
6. Last but not least CPI: look for a 2 year rise in all items, during which YOY is spiking up while monthly percentage changes are decreasing. During this same period all items ex food & energy will be decreasing as well.
All prices have been going up for 2 years and CPI YOY along with the drop in durable goods PCE really shows it.
Yet, the overall monthly percentage increases are shrinking and the ex food & energy prices are decreasing. Why? The smoke and mirrors of globalization.
Margins are getting wider due to outsourcing to cheap labor at the margin. As domestic demand drops, price elasticity kicks in for ex food & energy items because there are more imports to mask what is really going on beneath the surface.
Finally, thinking all is well and falling for their own head fake, the consumer goes on a last minute spending binge on durable goods, reversing the two year trend and spiking current year durable and PCE just before the bottom drops out.
You can overlay all of these statistics during the same period on the BEA and BLS web sites and see it in Technicolor for yourself.
For the CPI use: U.S. All items, 1982-84=100 - CUUR0000SA0 and U.S. All Items Less Food and Energy - CUUR0000SA0L1E at this BLS link.
For the rest of the data go to the BEA link: and under section 1 Domestic Product and Income select Table 1.1.1. Percent Change From Preceding Period in Real Gross Domestic Product.
Be sure to use 12 month YOY percentage increases in the charts, it really stands out that way.
In these pages, we have been banging on the drum that the econometrics used as "a compass" to steer economic decisions have inherent inaccuracies and latencies.
This causes the government agencies that use them to more often than not, under or over shoot their intended targets.
There is a definite pattern in the 1998-1999 data which leads up to the 2000 collapse.
Although in hindsight which is 20/20, the Fed may not have seen the pattern in which some indicators started to wave red flags as early as 1998 and as late as Q4 1999, which in the case of the latter, was way too late.
To be sure, navigating in real time with a rusty depolarized compass is no picnic. Here are some things to look for in the 1998-1999 data graph.
1. 1998 -1999 PCE a public spending head fake - look for a 3 month or greater spike in durable goods and overall PCE, coupled with a drastic YOY drop in durable goods during that same time period. (We explain the spike in current durable vs the YOY drop in durable later)
Durable goods and YOY drop tell you this is "happy daze" or joy spending, big ticket items are not on the menu, because times are tough.
2. 1998-1999 Gross Private Domestic Investment - Fixed Investment, Nonresidential & Equipment/Software: look for a 3 month or greater drop along with a drastic YOY drop during the same period.
John Q. Public is "soft" spending, corporations and investors are pulling in their horns.
3. 1998-1999 Government Consumption Expenditures - Federal and Defense: look for a 3 month or greater drop along with a drastic YOY drop during the same period.
Not only are the private sector not spending, neither is the government, John Q is left to dangle in the wind all alone.
4. 1998-1999 GDP - look for a 3 month or greater drop along with a drastic YOY drop during the same period.
This drop should occur after a quarterly spike to the upside (head fake), and is symptomatic of what happens after the head fake to a one legged animal who is hopping along on "joy" spending.
5. 1998-1999 Imports/Exports: look for a 3 month or greater increase of imports combined with a decrease of exports during the same period.
As plants close and layoffs occur, domestic production contracts forcing a decrease in exports and an increase of imports.
6. Last but not least CPI: look for a 2 year rise in all items, during which YOY is spiking up while monthly percentage changes are decreasing. During this same period all items ex food & energy will be decreasing as well.
All prices have been going up for 2 years and CPI YOY along with the drop in durable goods PCE really shows it.
Yet, the overall monthly percentage increases are shrinking and the ex food & energy prices are decreasing. Why? The smoke and mirrors of globalization.
Margins are getting wider due to outsourcing to cheap labor at the margin. As domestic demand drops, price elasticity kicks in for ex food & energy items because there are more imports to mask what is really going on beneath the surface.
Finally, thinking all is well and falling for their own head fake, the consumer goes on a last minute spending binge on durable goods, reversing the two year trend and spiking current year durable and PCE just before the bottom drops out.
You can overlay all of these statistics during the same period on the BEA and BLS web sites and see it in Technicolor for yourself.
For the CPI use: U.S. All items, 1982-84=100 - CUUR0000SA0 and U.S. All Items Less Food and Energy - CUUR0000SA0L1E at this BLS link.
For the rest of the data go to the BEA link: and under section 1 Domestic Product and Income select Table 1.1.1. Percent Change From Preceding Period in Real Gross Domestic Product.
Be sure to use 12 month YOY percentage increases in the charts, it really stands out that way.
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