Blogger's View of the Fed

The Kauffman Economic Outlook, a survey of economics bloggers, is out for Q2.  The survey had two interesting questions on the Fed, one of which I submitted.  Thanks to Tim Kane for including it in the survey.  Here is the question and the results:

I am not entirely surprised by these results.  Most popular accounts and thus the emerging narrative about this experience either downplay or ignore the studies that have shown the monetary policy was a major contributor.  I won't rehash them here, but will note that I am editing a book that does shift the focus back to the role the Fed played in the boom and the bust. Stay tuned for more news on the book.

I was very surprised to see the responses to the second Fed question.  It was submitted by Bryan Caplan and Steve Miller:

Wow.  Only 16% of the economic bloggers believe the Fed has had a net negative effect while 40% think the Fed has been good on balance.  This is surprising. These folks need to read the assessment of the Fed by George Selgin, William D. Lastrapes, and Larry H. White.

A Double Dip Recession?

The topic du jour in many parts of the economics blogosphere is whether there will be a double-dip recession in the second half of 2010. Some folks like MacroAdvisors see absolutely no chance of a recession while others like David Rosenberg see a 80% probability of another recession. Other observers like Yves Smith, meanwhile, question whether there has even been a real recovery at all. One bit of information that is stoking the coals of this debate is the ECRI's weekly leading economic indicator series. Supposedly this is one of the better leading indicator series and as a result some folks have taken notice of the recent 5-week decline in the series as evidence there is a real chance of a double-dip recession. This series is graphed below (click on figure to enlarge):


I thought it would be interesting to use this series to help forecast real GDP over the second half of this year. To make this forecast I first converted the weekly series into a monthly one and plugged it into a vector autoregression (VAR) model that also had the monthly real GDP series from MacroAdvisors (yes, the same ones who see no recession later this year). Using 6 lags of data, I estimated this simple two-variable VAR and forecasted monthly real GDP for the months of May, 2010 through December, 2010. The forecast starts in May since the current real GDP data only goes through the month of April.

So what does this precipitous decline in the ECRI leading indicator mean for real GDP going forward? Here is how the VAR answers the question:


Real GDP will slow down to about 0% growth according to this simple model. This forecast is consistent with many observers--including ECRI as seen this video--who see a growth slowdown the second half, but not an outright contraction of the economy. I would note, though, that this type of analysis should only serve as a baseline forecast. Other developments such as a worsening of the Eurozone crisis or premature tightening of economic policy could further undermine U.S. economic growth.

If Only There Were a Nominal GDP Futures Market...

Ryan Avent suggests I may have been a bit rash in concluding there is no need to be alarmed about the future path of U.S. aggregate demand. He notes that despite the evidence I show, global financial markets--which are forward looking--have been weakening during the past month for good reasons:

On Monday, Christopher Wood took to the pages of the Wall Street Journal to make the case that a double dip recession is a real possibility. He cited the weakening outlook in Europe, the threat that outlook poses to financial markets, a cycle of tightening policy in China, along with the growing deflationary threat and the possibility of a wave of protectionist activity.

To what does all of this amount? Clearly, the outlook for the global economy has worsened in the last month, but by how much? Markets provide some evidence. In America, stocks are still up a good 50% from the lows hit early in 2009. Commodity prices, too, are well above the levels they plumbed during the darkest days of the recession. If the outlook isn't as good as it was in April, it is still considerably better than it was last spring. But this grows less encouraging as markets continue to fall.

The evidence I showed were various proxies for current aggregate demand and a consensus forecast for aggregate demand over the next year. They all pointed up. I also showed the sharp productivity gains which should account for the deflationary pressures. For me, this data clearly says the deflation concerns arising from the April CPI report are misplaced. But here is the rub: all of my evidence goes only through April. Ryan is looking at more recent market data which does paint a bleaker outlook. Too bad we don't have a nominal GDP futures market to shed light on these developments.

Nouriel Roubini: The Prophet Jeremiah or Joseph in Egypt?

A few weeks ago I wrote the following:

It is worth noting that Nouriel Roubini predicted Fannie and Freddie's collapse back in August 2006. If you are curious as to how the rest of this financial crisis will unfold, take a look at Nouriel's 12 steps to financial disaster. Let me add Nouriel to my list of certified economic prophets.

Now Robin Goldwyn Blumenthal at Barrons makes a similar comparison:

LIKE THE EXHORTATIONS OF JEREMIAH TO THE NATION OF Israel before the first temple's destruction, the warnings of economist Nouriel Roubini fell on deaf ears. For the past two years Roubini, a professor at New York University, has cautioned about a huge housing bubble whose bursting would lead to a 20% drop in home prices; a collapse in subprime mortgages; a severe banking crisis and credit crunch; the near-failure of Fannie Mae and Freddie Mac, and a U.S. recession of a magnitude not seen since the Great Depression. So far, this latter-day prophet of doom has been on the mark, though time will tell about the recession part.

I love the prophet Jeremiah analogy. I wonder, though, if the Biblical character Joseph would be a better comparison for Roubini. After all, both were taken from their home lands (Canaan, Turkey/Italy) , educated in at the finest centers of learning of their time (Egypt, Harvard), and warned that the good economic times would be followed economic bust (7 years of abundance-7 years of famine, 4 years of housing boom, 2 -3 years of housing bust and residual fallout). Joseph, of course, was better at calling the turning point and had a longer forecast horizon, but I think he still makes a better comparison than Jeremiah. What do you think?

A Future of Stagflation or Deflation?

Maybe neither, but economic doomsayers seem to be divided on this issue. Here is what Google trends is reporting (click on picture to enlarge):


Google trends, then, indicates more people are concerned about a future of stagflation. It would be interesting to see what a prediction market contract would say on this question.