Relevant and even prescient commentary on news, politics and the economy.

Bill McBride, Krugman, and Business Insider

Congratulations Bill.

Joe Weisenthal at Business Insider offers some hyperbole in The Genius Who Invented Economics Blogging Reveals How He Got Everything Right And What’s Coming Next, but also offers well deserved praise for Bill McBride and Calculated Risk.  Paul Krugman in the NYT posts  All Hail Calculated Risk and praises Bill’s work as well.

Bill has a gift for telling an evolving story in graph form that readers can follow over time, such as this one on jobs, and picking data that has held up over time as well as being useful. (Economist Spencer England praises Bill’s data in our own Employment Situation Reports this year)

As Bill makes clear on his website, Tanta was an important part of Calculated Risk beginnings. (See Ken Houghton’s note here).

With unabashed enthusiasm I am happy to highlite that Bill was a Bear until moving to his own site full time in late 2005.

Here are some Angry Bear  links posted by CR  from those times.  A bit of fun to color this post with some reflected glory.

A Regulatory Substitute to Burst Housing Bubble? ,  When will housing slowdown

Housing update ,   Housing and recession ,  After the housing boom impact on the economy

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More Detail on Working the Refs

So there are several comments to my previous post. Ignoring the a good one from Dr. DeLong, several people are taking umbrage at my unsubtle suggestion that the effect on employment being suggested is, to be polite about it, rather creative.

kharris begins, “So let me see if I have this right. If anybody tries to figure out what the impact of snow on economic data might be, they are big fat liars? But those who know that the economy is in bad shape, without reference to actual events, is a stand-up kind of hack?”

Following is an expansion of my comment in that thread, with data:

To the second question, well, I may be a hack, but my stand-up days are in the past. But given the choice between believing that the recovery is in full swing and that long-term unemployment is getting worse and jobs are not and will not be created, well, I’ll take the CBO projection as the baseline:

CBO expects the unemployment rate to average a little over 10 percent for the first half of 2010, and it will probably not dip below 9 percent until 2012.

and note that if we’re calling that a recovery, our definitions have become Very Generous. So bold claims of recovery need to be tempered by the prospect of worse headline unemployment (U-3) for the next five months (including February) and no significant recovery for the eighteen after all.

Sorry I’m not doing handstands that GDP might be slightly positive for a few quarters of sub-replacement level employment increases, but I didn’t cheer the “recovery” of 2002 either, so at least I’m a consistent hack.

To the first: Not at all; trying to figure out the effect is fair game and perfectly reasonable. But the declarations so far are all running in one direction: we believe the economy is better than the data will be, so we need to wait if it looks bad. (See Ms. Caldwell as quoted by CR or Catherine Rampell, for example.) Rampell:

That report will probably be very, very ugly. I have seen some forecasters project job losses as high as 100,000.

The main culprit behind the expected jobs plunge is the blizzard, which closed businesses and kept people from going to work or even seeking work for days and sometimes weeks. These work stoppages probably occurred precisely when the government was collecting data for its February jobs report.

So the current estimates are all that (1) demand was down and (2) employment was down.

And (3) deliveries were down: see the ISM data.

Put it all together, and you can tell a story of heavy snow snarling shipments to and from manufacturers, slowing down production growth.

But at least in this case, we have a clear indicator: the increase in backlogged orders.

Finally, (4)savings.

The reasons for the stall are twofold: For one, rebounding wealth since the recession’s depths has helped provide some support for consumer spending. Secondly, weak income growth has left other consumers with little choice but to spend proportionally more of their incomes, particularly in light of [5] still-tight credit conditions.

So demand, supply, savings, credit, and employment are all down. The first and second are aberrations of snow (and equilibrium), the second and third abide.

Which leaves employment, which is discussed in more detail than most sane people would want below the fold.


Now, it is clear that people who are employed did not work in the week. But they are not likely to have reported themselves as “unemployed” or (except in a very literal sense) “out of work.” True, they did not produce—but what they would have produced was not bought, and hence there is a backlog of orders.

But companies that now have backlogs of orders know that this was because they did not have their current workforce. Accept an order to produce, say, 200 units (which takes a month to produce) and lose five to eight business days and you’ll be 50-80 units behind.

But you’re not going to go out and hire a new person to fill the backlog.

Yes, there was an effect on production and sales. But the idea that 100-200K jobs went unfulfilled solely because of weather conditions that were aberrant primarily in the mid-Continent is either (1) rather optimistic or (2) ignoring that the excess snow effect was mostly in the areas that are least underemployed. (See this nice map from Catherine Rampell)

So in the best case scenario, the recovery was muted because things were not delivered or sold—though money (savings) was (were) spent. And the only reason firms didn’t hire was the snowstorm that closed D.C. and delayed Philadelphia. (Though there was no snow in NYC and, as noted, nothing unusual about the fallings in the Midwest.)

The worst case scenario is that demand wasn’t filled solely because supply wasn’t available because existing workers could not produce. Working on the “nine women pregnant for a month don’t produce a baby and you have a real problem eight months thereafter” rule, employers will (generally correctly) view their February backlog as a result of existing labor not working, not as a need to hire new workers.

If you’re balancing the effects of those two—standard Slutsky analysis, as it were—there is a high likelihood that hiring will be dampened going forward by the snowstorm as firms underestimate actual demand. It is less likely that actual hiring was significantly reduced by it.

But that’s not the way the discussion is going. So a bad (negative) number has excuses, a poor number (positive, but less than replacement rate) has excuses and should be seen as “good,” and a good number (replacement rate or better) will mean “all ahead full.”

So I tried looking at ancillary data. Looking at power usage, for instance, indicates a major decline that would correspond to less activity(Table 1.6.b; Commercial usage YOY down 3.6%; Industrial usage YOY down 5.6% with declines in all areas; total usage down 4.3% YOY [Table 1.1])—but that’s only through November.

Maybe the past three months have been part of a miraculous recovery. But it’s not in employment, its not in the available energy usage data, and it doesn’t follow from the ISM data, which indicates slow growth at best.

Those who want to claim the economy is recovered have been, as noted, “working the refs.” So a bad number (by Rampell’s apparent reasoning) will kill health care reform, but not mean that we need a second stimulus—even though the states are hemorrhaging money and, soon, jobs. (Teachers, police and fire–you know, all the nonessential personnel.)

It’s a heads-we-win-tails-we-win-more situation being set up.

If we pretend that all of the argument are true: that the snowstorm was a once-in-a-lifetime event and that it really did produce a major skew though, we might want to look at what happened the last time a “once-in-a-lifetime event” occurred near the end of a recession.

The vertical lines are at September and December of 2001. For a week in September, everyone—and this time I mean everyone, not just the bottom third of the Bos-Wash corridor—stopped shopping for a week. As predicted above, the employment effects abided for at least the next few months. (Recall, after all, that that recession officially ended in November.)

Given the choice between (1) assuming that there will be a one-off decline in employment due to the snow and that everything will return to recovery next month or (2) that there will be a lingering, negative employment effect from the snowstorm and attendant business slowdowns, there appears to be only one way to bet, given the data and the history.

Yet the calls right now—absent evidence—are going the other way.

If we’re working from anecdotal evidence, then certainly there is a recovery. It’s the extant data that doesn’t support any recovery that is not also described as “jobless and uncertain.” That may change on Friday. But it’s not the way to bet, no matter how much the refs are worked.

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Working the Refs

So there was this big snowstorm that hit the East Coast a couple of weeks ago. (Not the one this weekend, that dumped about 2′ of snow on Upstate New York and a little more than a foot here in suburban New Jersey; the one that wiped out D.C. and gave the Party of No an excuse to do nothing.)

Snow in February. What a surprise! Clearly, not something that happens every year.

My high school classmates and others in the Midwest see the notice and say, “Yeah, gosh, sounds like January and February here.”

But This One is Different. Maybe because it gave the U.S. press an excuse to pay no attention to Haiti. Maybe because closing down D.C. meant that all the pundits got to whine and reveal their suffering.

And, just maybe, because it has become the all-purpose excuse for the February Employment Report. Or any other hint that the world is not perfect, and those “green shoots” haven’t been eaten by starving deer who were then shot by Big Bank Hunters.

The Usual Suspects are already out in force.* And the hedging (not in the risk management sense) has begun:

“We will have to wait until March to see if February is an aberration or a fundamental sign that the recovery in sales will be more subdued than hoped,” [Jessica Caldwell, Edmunds’ director of industry analysis said].

So anything that can be marginally interpreted as positive will be The Crest of a Wave, while anything that makes those legendary shoots look as if they were artificial flowers will get the rousing “Wait Until March!” cry.

All we really know is that—thanks to Senator Bunning and a pliant Democratic “leadership”—March, not April, is the Cruelest Month for about 1.2 million normally-working Americans.

But, gosh, the job gains for February might be understated by 5-8% of that total. So let’s not do anything hasty.

*Yes, it’s “pick on Brad DeLong day.” Didn’t you get the memo? (Also, I can’t find discussion of the topic at any of the Other Usual Suspects, though I haven’t checked The Big Picture.)

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Today in "Economists Are NOT Totally Clueless" (Part 1 of 2 or 3)

The WSJ collects reactions to the release of the latest Case-Shiller index. Let’s look at two, just for fun:

One in four mortgages are currently underwater. Foreclosure and delinquency rates, which hit a record high at the end of the third quarter of 2009, are therefore likely to continue to rise, perhaps sharply. In addition to this, the inventory of homes for sale remains near record highs. … Despite the recent positive reports on housing prices, we believe that prices have further to fall—about another 5%-10%. — Patrick Newport, IHS Global Insight….

When the Case-Shiller index began increasing in the summer, there were concerns that exaggerated seasonal patterns were an important driver, as trends had briefly improved in the summer of 2008 as well. However, while some seasonality does appear to have been present, the fact that the Case-Shiller home price index is continuing to increase is good news. We still believe that home prices could fall a bit over the course of 2010, but the majority of the price adjustment has probably already occurred. — Abiel Reinhart, J.P. Morgan Chase

I’m not cherry-picking here. I could make fun of the excluded “the long-awaited U.S. housing market recovery is well upon us” all day, but I’ll leave that one to CR (who, I now see, has already done a Variation on the Theme).

But let’s look at pieces of the two points, and see why I’m not sanguine (besides being long housing, that is):

  1. One in four mortgages are currently underwater. One in four = 25%.
  2. “[W]e believe that prices have further to fall—about another 5%-10%.”
  3. “[T]he Case-Shiller home price index is continuing to increase”
  4. “Home prices could fall a bit over the course of 2010, but the majority of the price adjustment has probably already occurred.”

Even if you take all of those at face value, you have to combine Bad Economics and Bad Policy to assume the worst is near over.

Details below the fold.

Bad Economics: If 25% of households are underwater right now, it would be foolish to assume that those people would or should stay in their house. (Steve Randy Waldman made this point a while back.)

This doesn’t mean that all 25% of those householders should move. There are major transaction costs in moving, not the least of which is the cost of moving itself. Renting will not be a better deal for everyone, but more and more people are going to realize that not walking away will be A Bad Idea, damaging the future of their child and themselves long after any credit report impact will have dissipated.

And if prices are still 5-10% above where they will be, the decision will become that much more inevitable, especially in areas where employment is lagging.

Looking at the “bright spot”—the counterintuitive rise in the Case-Shiller Index—which looks less firm than one might gather from the commenters—we see that this is another Second Derivative Problem: the pace of the decline has slowed (7.3% YOY) and the gain (“a seasonally adjusted 0.4%”) comes primarily from two areas (Phoenix, which has the largest YOY decline in the Index, and SF), with only five other positive gains over the month, none greater than 0.4% (SD; New York City is flat).

There are green shoots there, but they are on rather fallow ground.

Bad Policy is made clear in the last point: “the majority of the price adjustment has probably already occurred.”

Let’s assume that statement is true. We are, therefore, slightly away from equilibrium, but probably close enough.

But 25% of householders are underwater. And probably 80% of those—one in five “homeowners”—would have their economic situation improved by walking away and renting.

The term that comes to mind is “deadweight loss.” And let’s look at that in the next post.

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What Brad DeLong Said: Rest in Peace Doris Dungey, "Tanta"

UPDATE: For those who read here and not at CR, a link for Donations.

We knew she was home with her family, but it was over the U.S. Thanksgiving holiday…

Calculated Risk:

Sad News: Tanta Passes Away: My dear friend and co-blogger Doris “Tanta” Dungey passed away early this morning. I would like to express my deepest condolences to her family and friends…

Tanta was one of the people—along with CR, PGL, DeLong, and Mark Thoma (and probably a few others I’ve overlooked, such as Max Sawicky**)—who proved early on that long, informative blog posts about issues that might be considered arcane* could find an audience.*** Including people who knew what you were talking about and could provide complementary insights and information.

Via CR, David Streitfeld sums it up:

Thanks in large part to Tanta’s contributions, Calculated Risk became a crucial source of prescient analysis as the housing market at first faltered, then collapsed and finally spawned a full-blown credit crisis.

Tanta used her extensive knowledge of the loan industry to comment, castigate and above all instruct. Her fans ranged from the Nobel laureate Paul Krugman, an Op-Ed columnist for The New York Times who cited her in his blog, to analysts at the Federal Reserve, who cited her in a paper on “Understanding the Securitization of Subprime Mortgage Credit.”

There are a lot of people out there who are saying now that “we all knew there would be a crisis.” Tanta is one of the main reasons for that.

She will be is missed.

*Robert Waldmann’s investigative series on Credit Products is a current AB example.

**The lack of conservative economists on the list is not my fault; the Mankiws and Tyler Cowens of the world rarely if ever go into detail about the system or the implications surrounding their statements.

***UPDATE: See the Ubernerd posts, collected here.

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