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Durable goods orders: more evidence of near-term weakness in the US economy

They keep calling it a ‘soft patch’ in my business; but when’s the data going to show otherwise? This soft patch is persistent, and durable goods orders confirm it into Q2 2011.

Note: The ‘all manufacturing’ orders Y/Y growth rate are available through March only in Datastream for the chart above; the nondefense capital goods ex aircraft orders are current through Aptil.
READ MORE AFTER THE JUMP!From the Census April preliminary release on durable goods orders and shipments:

New orders for manufactured durable goods in April decreased $7.1 billion or 3.6 percent to $189.9 billion, the U.S. Census Bureau announced today. This decrease, down two of the last three months, followed a 4.4 percent March increase. Excluding transportation, new orders decreased 1.5 percent. Excluding defense, new orders decreased 3.6 percent.

We know that the auto industrial production print was influenced by the supply chain disruptions stemming from the Japanese earthquake. This probably affected the durable goods orders and shipments as well. Furthermore, the big monthly drop was driven (partially) by a large 30% decline in nondefense aircraft and parts orders over the month.

But the gist of the report, in my view, was disappointing. Total durable goods shipments fell 1% over the month, while new orders plummeted 3.6%. This is a very volatile series, and the March growth in new orders was revised upward to 4.4% over the month from 2.5%; but the average growth rate in ‘core orders’ is showing holes.

Core durable goods orders, ‘nondefense capital goods excluding aircraft’ – a leading indicator of domestic investment spending on equipment and software – fell 2.6% over the month. Volatile, yes; but the real core goods orders turned negative, -0.33% on a 3-month average growth basis, furthering a downward trend that’s been in place since January 2011. The April figure was down 0.2% on a real basis compared to the January-March 2011 average – not a good start to Q2 2011.(The real series is constructed using the CPI durable goods deflator.)

The contributions to Q1 2011 fixed investment spending demonstrate that the entirety of fixed investment growth came from equipment and software, 0.8% quarterly contribution. (On data, you can view the contributions data in Table 2 of the release here or download the data for the entire report here.)

So when will this ‘soft patch’ end? Neil Soss today tells me that 2H 2011 will be quite the kicker, as the temporary supply chain disruptions to industrial activity wear off. We’ll see. It’s going to take quite a bit of growth in 2H 2011 to get the US back on track to the consensus 2011 growth forecast of 2.7% (according to Consensus Economics May report).

Rebecca Wilder

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Guest post: Mark Provost Why the Rich Love High Unemployment

Guest post by Mark Provost

Why the Rich Love High Unemployment
via Truthout

Christina Romer, former member of President Obama’s Council of Economic Advisors, accuses the administration of “shamefully ignoring” the unemployed. Paul Krugman echoes her concerns, observing that Washington has lost interest in “the forgotten millions.” America’s unemployed have been ignored and forgotten, but they are far from superfluous. Over the last two years, out-of-work Americans have played a critical role in helping the richest one percent recover trillions in financial wealth.

Obama’s advisers often congratulate themselves for avoiding another Great Depression – an assertion not amenable to serious analysis or debate. A better way to evaluate their claims is to compare the US economy to other rich countries over the last few years.

On the basis of sustaining economic growth, the United States is doing better than nearly all advanced economies. From the first quarter of 2008 to the end of 2010, US gross domestic product (GDP) growthoutperformed every G-7 country except Canada.

But when it comes to jobs, US policymakers fall short of their rosy self-evaluations. Despite the second-highest economic growth, Paul Wiseman of the Associated Press (AP)reports:“the U.S. job market remains the group’s weakest. U.S. employment bottomed and started growing again a year ago, but there are still 5.4 percent fewer American jobs than in December 2007. That’s a much sharper drop than in any other G-7 country.” According to an important study by Andrew Sum and Joseph McLaughlin, the US boasted one of the lowest unemployment rates in the rich world before the housing crash – now, it’s the highest.[1]

The gap between economic growth and job creation reflects three separate but mutually reinforcing factors: US corporate governance, Obama’s economic policies and the deregulation of US labor markets.

Old economic models assume that companies merely react to external changes in demand – lacking independent agency or power. While executives must adapt to falling demand, they retain a fair amount of discretion in how they will respond and who will bear the brunt of the pain. Corporate culture and organization vary from country to country.

In the boardrooms of corporate America, profits aren’t everything – they are the only thing. A JPMorgan researchreportconcludes that the current corporate profit recovery is more dependent on falling unit-labor costs than during any previous expansion. At some level, corporate executives are aware that they are lowering workers’ living standards, but their decisions are neither coordinated nor intentionally harmful. Call it the “paradox of profitability.” Executives are acting in their own and their shareholders’ best interest: maximizing profit margins in the face of weak demand by extensive layoffs and pay cuts. But what has been good for every company’s income statement has been a disaster for working families and their communities.

Obama’s lopsided recovery also reflects lopsided government intervention. Apart from all the talk about jobs, the Obama administration never supported a concrete employment plan. The stimulus provided relief, but it was too small and did not focus on job creation.

The administration’s problem is not a question of economics, but a matter of values and priorities.  In the first Great Depression, President Roosevelt created an alphabet soup of institutions – the Works Progress Administration (WPA), the Tennessee Valley Authority (TVA) and the  Civilian Conservation Corps (CCC) – to directly relieve the unemployment problem, a crisis the private sector was unable and unwilling to solve. In the current crisis, banks were handed bottomless bowls of alphabet soup – the Troubled  Asset Relief Program (TARP), the Public-Private Investment Program (PPIP) and the Term Asset-Backed Securities Loan Facility (TALF) – while politicians dithered over extending inadequate unemployment benefits. 

The unemployment crisis has its origins in the housing crash, but the prior deregulation of the labor market made the fallout more severe. Like other changes to economic policy in recent decades, the deregulation of the labor market tilts the balance of power in favor of business and against workers. Unlike financial system reform, the deregulation of the labor market is not on President Obama’s agenda and has escaped much commentary.

Labor-market deregulation boils down to three things: weak unions, weak worker protection laws and weak overall employment. In addition to protecting wages and benefits, unions also protect jobs. Union contracts prevent management from indiscriminately firing workers and shifting the burden onto remaining employees. After decades of imposed decline, the United States currently has thefourth-lowest private sector union membershipin the Organization for Economic Cooperation and Development (OECD).

America’s low rate of union membership partly explains why unemployment rose so fast and, – thanks to hectic productivity growth – hiring has been so slow.

Proponents of labor-market flexibility argue that it’s easier for the private sector to create jobs when the transactional costs associated with hiring and firing are reduced. Perhaps fortunately, legal protections for American workers cannot get any lower: US labor laws make it the easiest place in the word to fire or replace employees,according to the OECD.

Another consequence of labor-market flexibility has been the shift from full-time jobs to temporary positions. In 2010,26 percent of all news jobs were temporary– compared with less than 11 percent in the early 1990’s recovery and just 7.1 percent in the early 2000’s.

Fight the lies and misinformation! Please make a tax-deductible donation to Truthout today and keep real independent journalism strong.

The American model of high productivity and low pay has friends in high places. Former Obama adviser and General Motors (GM) car czarSteven Rattner arguesthat America’s unemployment crisis is a sign of strength:

Perversely, the nagging high jobless rate reflects two of the most promising attributes of the American economy: its flexibility and its productivity. Eliminating jobs – with all the wrenching human costs – raises productivity and, thereby, competitiveness.

Unusually, US productivity grew right through the recession; normally, companies can’t reduce costs fast enough to keep productivity from falling.

That kind of efficiency is perhaps our most precious economic asset. However tempting it may be, we need to resist tinkering with the labor market. Policy proposals aimed too directly at raising employment may well collaterally end up dragging on productivity.

Rattner comes dangerously close to articulating a full-unemployment policy. He suggests unemployed workers don’t merit the same massive government intervention that served GM and the banks so well. When Wall Street was on the ropes, both administrations sensibly argued, “doing nothing is not an option.” For the long-term unemployed, doing nothing appears to be Washington’s preferred policy.

The unemployment crisis has been a godsend for America’s superrich, who own the vast majority of financial assets – stocks, bonds, currency and commodities.

Persistent unemployment and weak unions have changed the American workforce into a buyers’ market – job seekers and workers are now “price takers” rather than “price makers.” Obama’s recovery shares with Reagan’s early years the distinction of being the only two post-war expansions where wage concessions have been the rule rather than the exception. The year 2009 marked the slowest wage growth on record, followed by the second slowest in 2010.[2]

America’s labor market depression propels asset price appreciation. In the last two years, US corporate profits and share prices rose at the fastest pace in history – and the fastest in the G-7.    Considering the source of profits, the soaring stock market appears less a beacon of prosperity than a reliable proxy for America’s new misery index. Mark Whitehouse of The Wall Street JournaldescribesObama’s hamster wheel recovery:

From mid-2009 through the end of 2010, output per hour at U.S. nonfarm businesses rose 5.2% as companies found ways to squeeze more from their existing workers. But the lion’s share of that gain went to shareholders in the form of record profits, rather than to workers in the form of raises. Hourly wages, adjusted for inflation, rose only 0.3%, according to the Labor Department. In other words, companies shared only 6% of productivity gains with their workers. That compares to 58% since records began in 1947.

Workers’ wages and salaries represent roughly two-thirds of production costs and drive inflation. High inflation is a bondholders’ worst enemy because bonds are fixed-income securities. For example, if a bond yields a fixed five percent and inflation is running at four percent, the bond’s real return is reduced to one percent. High unemployment constrains labor costs and, thus, also functions as an anchor on inflation and inflation expectations – protecting bondholders’ real return and principal. Thanks to the absence of real wage growth and inflation over the last two years, bond funds have attracted record inflows andinvestors have profited immensely.

The Federal Reserve has played the leading role in sustaining the recovery, but monetary policies work indirectly and disproportionately favor the wealthy. Low interest rates have helped banks recapitalize, allowed businesses and households to refinance debt and provided Wall Street with a tsunami of liquidity – but its impact on employment and wage growth has been negligible.

CNBC’s Jim Cramerprovides insightinto the counterintuitive link between a rotten economy and soaring asset prices: “We are and have been in the longest ‘bad news is good news’ moment that I have ever come across in my 31 years of trading. That means the bad news keeps producing the low interest rates that make stocks, particularly stocks with decent dividend protection, more attractive than their fixed income alternatives.” In other words, the longer Ben Bernanke’s policies fail to lower unemployment, the longer Wall Street enjoys a free ride.

Out-of-work Americans deserve more than unemployment checks – they deserve dividends. The rich would never have recovered without them.

1. “The Massive Shedding of Jobs in America.” Andrew Sum and Joseph McLaughlin. Challenge, 2010, vol. 53, issue 6, pages 62-76. 

2. David Wessel, Wall Street Journal, January 30, 2010.“Wage and Benefit Growth Hits Historic Low”; Chris Farrell, Bloomberg Businessweek, February 5, 2010.” US Wage Growth: The Downward Spiral.”

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"Top X" economics blogs

by Mike Kimel

I recently got an e-mail from a fellow blogger asking me to link a list that blogger made of “top X” economics blogs. (And no, I will not link to the list or identify that blogger.) My response:

Hi. Umm…. I looked over your list, and while there are some very good blogs on it, there are also some that frankly, from what I can tell, specialize in peddling misinformation. By that I do not mean blogs that have a perspective with which I disagree. I tend not to agree, for example, with the folks at Marginal Revolution on many things, but they produce an excellent blog with well thought out posts and which generally get the facts right. I myself have listed them as a daily read at Angry Bear and would recommend them to anyone.

On the other hand, your list contains four blogs that from what I can tell are more likely to state or link to “facts” that are not true. There are also several blogs I do not recognize on the list so it is possible that there are more misinformation peddlers than that on the list. I am very sorry, but I cannot recommend your list to anybody.



How should one deal with those that peddle misinformation? Your thoughts?

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"Survey says"…. German growth has probably peaked

This week further evidence has emerged of Germany’s slowing growth trajectory. At 4.9% annual growth (calendar-adjusted) and a tightening bias from the ECB, this was, of course, to be expected.

Yesterday the Manufacturing May ‘Flash’ PMI by Markit Research highlighted, in my view, that sentiment is unlikely to remain at these absurdly elevated levels indefinitely, as the index dropped to 58.2 from 62 in April. Notably, the index remained above 60 for five consecutive months.

Today the Ifo Institute released its business survey for May, revealing that industry and trade remained stable in May. This index hovers at record highs compared to a post-unification time series.

Overall, while the two sentiment indicators diverged this month (the PMI waning, while the Ifo holding firm), the story remains that Germany is slowing down. Furthermore, the Ifo survey portends a deceleration in industrial production growth (IP), perhaps over the next quarter.

Exhibit 1 The ratio of the components of Ifo – expectations and current conditions – suggest a sharp reversal in the industrial production growth trend.

The chart correlates annual industrial production growth with the % differential between the expectations and current conditions components of the Ifo index at a 6-month lead. I don’t expect IP growth to turn negative, but a slowdown is certainly due.

Exhibit 2 Take the Ifo sentiment with a grain of salt!

Ifo really is more of a coincident indicator of economic growth than anything else. For example, the Ifo composite has a 77% correlation coefficient with annual real GDP growth. Previous to the current recovery/expansion, the Ifo index hit a peak of 108.7 in March 2008 only to see growth decelerate sharply the next quarter, 2.7% Y/Y to 1.6% Y/Y. My point is, while it’s a decent indicator of economic strength during expansions, it’s a terrible predictor of turning points.

We’re not at a turning point now – Ifo plus PMI demonstrate that the German economy continues to expand, albeit at a slower pace.

The real question is, what does this mean for the rest of Europe, specifically the Periphery? It’s not totally clear, but certainly with Germany contributing more than 50% to the quarterly growth rate in Q1, downside risks are emerging. Prieur du Plessis argues that this is related to the global slowdown in manufacturing.

Rebecca Wilder

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Tax Rates and Economic Growth Over Ten Year Time Horizons, plus Why a Flat Tax Would Result in Much Slower Economic Growth

by Mike Kimel

Tax Rates and Economic Growth Over Ten Year Time Horizons, plus Why a Flat Tax Would Result in Much Slower Economic Growth

Last week I had a post looking at the the real GDP growth maximizing income tax rate using both top marginal income tax rates and and “average marginal” “all-in” tax rates for all taxpayers (including those who paid nothing) computed by Barro & Sahasakul. The post noted that the optimal top marginal rate was in the neighborhood of 64%, a finding that corresponds with many other posts I’ve written on the topic. The post also noted that the Barro-Sahasakul rates were not as useful at explaining economic growth as the top marginal income tax rates.

David Altig of the Atlanta Fed commented on the piece here, but he essentially had one very gently delivered criticism and one follow-up comment. The criticism is that my post did not consider long run effects – for each year, it looked at how the tax rate that year would affect growth in real GDP from that year to the next. The comment was that the post’s results did not correspond with results of a paper he published in the AER with Auerbach, Kotlikoff, Smetters and Walliser. (Ungated version here. The paper

uses a new large-scale dynamic simulation model to compare the equity, efficiency, and macroeconomic effects of five alternative to the current U.S. federal income tax. These reforms are a proportional income tax, a proportional consumption tax, a flat tax, a flat tax with transition relief, and a progressive variant of the flat tax called the ‘X tax.’

In his post, Altig provides this graph:

Figure 1.

The graph shows that according to the Altig et. al simulation model, after about ten years, the growth maximizing tax (among the types they simulated) is a flat tax. I read the paper this afternoon, and while I have a few small quibbles (some of them raised by the authors themselves, to their credit), having done a bit of simulation work myself, I think there is one thing that is worth mentioning and which I can cover in this forum: results of a simulation must fit known facts.

Now… I think there is a quick and dirty way regression that can account for both a long range analysis and to test the notion of whether the cause of rapid economic growth is best served by a progressive tax system or a flat tax. Here’s what I have in mind:

equation 1: annualized growth in real GDP, t to t+10 = f(top marginal income tax rate, top marginal income tax rate squared, bottom marginal income tax rate, bottom marginal income tax rate squared)

The quadratic terms allow us to find the growth maximizing tax rates, as I’ve done in so many posts before. And by including both top and bottom marginal rates, we can compute the optimal growth maximizing top marginal rate and the growth maximizing bottom marginal rate. And… if a flat tax is the best tax, the optimal bottom rate should be more or less equal to the optimal top rate.

As in the previous post, data ran back to 1929, the first year for which real GDP was computed by the BEA. Top marginal and bottom marginal rates came from the IRS Statistics of Income Table 23.

So here are the results, as spit out by Excel.

Figure 2.

What this tells us is that each of the components of equation 1 are significant. For top marginal rates, we have the expected shape, and if you work it out (either with calculus or by plugging the numbers into a spreadsheet) you’ll find that the model claims the optimal rate is about 67%, and that getting tax rates there from the current 35% would add about 1.4% a year to real GDP growth.

For the bottom marginal income tax rate, things are a bit more complicated… it turns out that the expected quadratic shape isn’t there. In fact, the model indicates that tax rates should be as low as possible. In the range from 0 to 100, 0 is best. The model also provides support for the Milton’s Friedman negative income tax rate, though I’d say results are bit shakier there as rates were never at or below zero during the sample for which we have data. If I were to do it again, I think I’d specify the bottom marginal rate differently – no quadratic shape – but right now I gotta go. I would note – I’d also add a few other variables, both to account for the small degree of patterns that appear in the residuals and frankly, just to make the model more realistic. But its fairly clear – especially since I keep getting results that more or less the same no matter how I approach the problem, that better specification wouldn’t change the results all that much. They might push estimates of the top marginal rate down a bit, but its fairly clear that top marginal rates well above where they are now will lead to much faster economic growth.

And of course, the other thing we learn… because the effect of top and bottom rates are so very different, and relative to where they are now, pull economic growth in different directions, it makes no sense for the top rate and the bottom rate to be in close vicinity. Put another way – a flat tax is a very bad idea, at least when it comes to generating economic growth.

As always, if you want my spreadsheet, drop me a line via e-mail with the name of this post. My e-mail address is my first name (mike), my last name (kimel – with one m only), and I’m at

(Rdan…post was modified at 10 am to include the link to Altig’s post)

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Medicare Breaks the Inflation Curve

Besides her comments on the growing lack of influence of the AMA on Healthcare reform Maggie Mahar at Health Beat Blog writes about Medicare breaking the cost curve of the healthcare industry.

Medicare Breaks the Inflation Curve

Today, S&P released data tracking the growth of health care costs which showed that over the year ending March 2011pending rose at an annual rate of 2.78% posted for the Medicare Index in its six-year history. (Hat-tip to Kent Bottles for calling attention to this report on Twitter). This news is, as Bottles says, “very important”, not to mention timely, given the deficit debate in Washington.)

By contrast, over the same 12 months, health care costs covered by commercial insurers rose by 7.57%. Still, as the chart below shows, even these costs (tracked by the “commercial index”) have been falling, down from a peak inflation rate of nearly 10 percent in the 12 months ending in July 2010 to 7.5% in the 12 months ending March 2, 2011.

Why is health care inflation decelerating? In the commercial sector, the recession no doubt plays a major role. Insured patients often have high deductibles that must be paid before they receive care. As a result, hospitals report that patients are putting off elective surgery. Thus, commercial insurers are paying out a lower share of premiums. (See for example, Cigna’s most recent financial report which shows patients’ “relatively moderate use of medical services”.)

At the same time, it’s worth noting that commercial insurers’ reimbursements to hospitals continue to rise; the Hospital Commercial Index’s annual growth rate hit a peak of 9.36% in May of 2010, and as of March 2011, it still stands at an unaffordable 8.36%. This suggests that, even if hospitals are seeing fewer patients, they continue to “do more” to those patients who come through the door, billing insurers for more tests and treatments.

Meanwhile, hospitals with market clout have been ratcheting up their prices. Commercial insurers who want brand-name hospitals in their network have no choice but to over-pay. They then turn around and raise their premiums, passing the cost on to their customers. (Some claim that hospitals charge private insurers more because Medicare underpays—and thus they must make up for their losses by “shifting costs” to the commercial insurers. But economist Austin Frakt (The Incidential Economist) has written a compelling paper which reveals

If one is talking about hospital prices, perhaps a shift of 20 cents on the dollar is a justifiable estimate—which means far less than that ends up in premium increases.

Other economists agree that “cost-shifting” is greatly exaggerated. In some cases, marquee hospitals are simply gouging insurers.)

As measured by the Hospital Medicare Index, the amount that Medicare is paying out to hospitals, has fallen sharply and down from 8.30% in August 2009 to 1.18% in March 11. This is surprising. Medicare patients have less reason to postpone care:

• their deductible for Medicare Part B is just $162 (as of February, 2011),

• while their Part A deductible for hospital care ($1,132) is significantly lower than the $2,000 to $5,000 deductible a growing number of privately insured patients pay.

Medicare patients also have not been hit as hard by high unemployment and they may not be able to find a part-time job, but at least they don’t lose their Medicare if they lose a job.

Why are Medicare costs slowing? It appears that “costs for Medicare patients are being better contained than those covered under commercial insurance plans,” observes David M. Blitzer, chairman of the S&P Index Committee. And the provisions in the Affordable Care Act that will put Medicare on the road to financial solvency haven’t even begun to kick in. Meanwhile, conservatives argue that we must privatize Medicare, because taxpayers cannot affords “runaway” government entitlement programs. I wonder how they explain the S&P report.

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The Historical Relationship Between the S&P 500 and the Economy, Part 2: The Abrupt Rise of Short Term Investing

by Mike Kimel

The Historical Relationship Between the S&P 500 and the Economy, Part 2: The Abrupt Rise of Short Term Investing

Last week I had a post looking at how long it takes for events in the economy (in the guise of real GDP) to affect the stock market (represented by the S&P 500), and vice-versa. I noted that if you go back to 1950 and played with some correlations, you’d find that the S&P 500 tends to lead real GDP with the maximum effect occurring after about 10 quarters, and real GDP tends to lead the S&P 500 with the maximum effect occurring after about 16 quarters. Put another way – both the S&P 500 and real GDP affect each other (i.e., there seems to be virtuous cycle when things are going well, and a vicious cycle when things are going badly).

But… what if you look at shorter periods of time? Do these results hold? Using the same methodology as in the previous post – i.e., comparing the the correlation between the S&P 500 and real GDP in the same quarter, the correlation between the S&P 500 and the real GDP in the next quarter, the correlation between the S&P 500 and the real GDP two quarters later, etc. – we can find the number of quarters for which the effect of the S&P 500 on real GDP is greatest. But this time, instead of looking at for the period from 1950 to the present, we also look at it for the period from 1951 to the present, from 1952 to the present, from 1953 to the present, etc. This can tell us whether the degree to which the S&P 500 leads real GDP changes over time.

And here’s what that looks like graphically.

Figure 1.

So how do we interpret this? Well, for the 1950 to the present period, the strongest correlation between the S&P 500 and a lagged real GDP (lags checked: 0 to 24 quarters) occurred at around ten quarters. That rose to 11 quarters for the 1970 to the present period, and then in 2002 that rose again to 13 quarters. Results from the most recent sample periods may simply be a factor of there being very few years in those periods. Nevertheless, it does seem that the relationship between the S&P and lagged real GDP is fairly stable. The stock market does seem to be leading the economy, and it seems the biggest effect of the stock market on the real GDP seems to occur after 10 to 13 quarters.

But what about the other way? For the 1950 to the present period, it does appear that real GDP takes about 16 quarters, or four years, to have its greatest effect on the stock market. (That isn’t to say there aren’t shorter term effects – announcements about the latest quarter’s economic growth do tend to move the economy, but that effect may be short lived in the fickle world of modern stock market trading.) But has that relationship changed over time? Here’s a graph:

Figure 2

Urghhhh. How do we interpret this? The graph seems to indicate that early on, the economy led by about 4 years, and that lead-time slowly decreased over time until…. it simply dropped off a cliff in 1974. When the maximum lag is zero, that means that the highest correlation between the economy and the S&P 500 occurs with no lag at all. Note … not shown in the graph is the fact that the correlation between the real GDP and the S&P 500 in the same period began dropping at the same time as well.

What was that all about? My guess, and it is just a guess right now is that when the economy started to suffer high inflation, people lost the ability to judge whether there was “real” growth or not. When prices are rising rapidly, who really knows how the economy is performing or what they might do to company’s listed on the exchange. An alternative explanation that may be related… maybe big market players started paying a lot more attention to real GDP all of a sudden, and started becoming more interested in the short term.

The interesting thing is that once the stock market started to decouple and/or focus more on the economic short term, it stayed that way. To tie it in to something I wrote a while back, in Presimetrics, Michael Kanell and I note that the stock market performed better during the George Herbert Walker Bush administration, when the economy grew mediocrely, than it did under a number of presidencies that produced rapid growth, such as those of LBJ or Reagan.

So what about that big change at the end of the sample? Is the market starting to pay attention to the long term again, or is that spike a function of a very short sample toward the end? My bet, given how unstable it is, is the latter.

I wonder what all this means for value investing.

This post is the second in a series on the historical relationship between the economy and the stock market.

1. Data used in this post is the adjusted close of the S&P 500 going back to 1950 and quarterly nominal GDP going back to the same date. Because quarterly GDP figures measure the economy at the midpoint of the quarter, the S&P 500 for February, May, August and November are considered the analogous “quarterly” S&P 500 figures.
2. I’m not a financial advisor. I strongly suggest against making investments based on anything written above.
3. If you want my spreadsheet, drop me a line via e-mail with the name of this post. My e-mail address is my first name (mike), my last name (kimel – with one m only), and I’m at

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How to solve many problems

Post stimulated by Steve Benen. Content due to John Quiggin.

This is arithmetic “Arithmetic tells us there are two ways to achieve the goal: the government can bring in more money and put out less.”

This isn’t “a combination of cuts and tax increases were necessary when the deficit got really big”

Revenue doesn’t come from taxes only. Consider the TARP big bank bailout. The Treasury turned a profit. The debt is less than it would have been without that program, but it wasn’t a spending cut or a tax increase. Or how about the Carter Chrystler bailout (not the Obama Chrystler bailout). Ditto.

Sometimes the US Federal government buys risky assets. It doesn’t do this for the high returns, it does this to prevent bankruptcies. This is not a promising time to invest, obvoiusly the Federal Government only invests when no private agent is willing to invest. But it still often makes money (for those keeping score at home Fannie and Freddie and mabye GM are predicted to be the only exceptions and all of my predictions about how the official predictions are pessimistic have been confirmed so far).

I think that the Federal Government can handle it’s financial problem by issuing more bonds and investing the proceeds in riskier assets. Contrast the Social Security Administration with state meployee pension funds. The SSA faces an actuarial shortfall (not huge compared to its revenues and maybe just the result of pessimistic forecasts). So do some state pension funds. But wait no state pension fund has the same sort of huge year by year surpluses the SSA has had (even proportionally). They say they are solvent, because they claim they will get higher yields on their portfolios than they would if they had to invest only in Treasuries. The SSA would be solvent and then many trillions to spare if it were allowed to invest the way all other entities with trust funds invest. Why not ?

Now I have praised TARP and proposed more fancy federal financial transactions. This is not because I have any sympathy for the financial services industry. I think it should shrink. I think this would be an additional benefit from my approach. The high returns on financial assets reward the people who play the market compared to their more small c conservative friends and neighbors. This happens even if they tend to buy high and sell low (betting against more sophisticated investors). So they keep at it. This is what creates the huge profits in finance. Reduce those unreasonable risk premia and you reduce those huge profits.

Yes the Fed Gov would bear aggregate risk. If the economy tanked a lot of the nation’s losses would be in the form of a larger national debt (which people usually barely notice hence the need for this post) not lower personal wealth of individuals or lower book equity of firms. Oh yes, my plan to eliminate the debt without tax increases or spending cuts will also work as an automatic stabilizer causing higher aggregate demand in recessions and lower aggregate demand in booms (when consumption crowds out investment).

So I claim I have a simple proposal to eliminate the national debt and reduce the magnitude of the business cycle and reduce the obscene profits of financiers.

I am not joking.

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