GDP, Residential Investment and Savings
Submitted by
CalculatedRisk on Fri, 07/28/2006 - 6:46am (21 comments)
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How bizarre a coincidence is it that "MEW" is also the sound of a hungry kitten crying to latch onto a nipple?
CR - Just wanted to say I love the site, keep up the great work. Have you updated the MEW chart you published on Dec 9, 2005. I think that graph along with the personal savings graph in this article are critical. The only issue holding this economy together is how much more debt can the consumer take on. It seems like time is running out.
Thanks - SR
And yet the markets rally.
Does everyone believe that our entire economy hinges on whether or not the fed raises 25 bp in August?
I see a lot of bad things heading into 2H 06. I wonder what everyone else is seeing.
There are a few economist out there like you, Baker, Ritholtz, Krugman; who understand how much of the recent expansion was due to housing. Ergo, a collapse in housing will put the economy in serious jeopordy.
The Wall Street pundits seem to ignore this. (and not just Kudlow:-)
Of course they also didn't call the Dot.com bubble.
So is it stagflation then followed by deflation once we have enough defaults and housing really starts to collapse?
Isn't this a result of the fact that the traditional measures of inflation didn't incorporate the drastic increase in housing prices (hence in my view cost) and only now, that interest rates are higher and people must now rent do we see rents going up and in turn measures of inflation?
Wouldn't it be better to properly measure the inflation rate vs. having such a skewed measure that it only shows up well after the fact in a period when the economy is already heading south very quickly?
I'm curious to know any views people have on these questions.
bob, Professor Duy touched on this subject in his recent Fed Watch.
"[T]here is a reasonable position that argues that central banks should have a broader definition of price stability, one that includes asset prices as well as consumer prices. This would be the proper place to address the issue of house prices and monetary policy. In other words, the debate is not whether the BLS is accurately estimating inflation. The debate is really about what measure of prices the central bank should monitor, a narrowly defined consumer measure (that excludes food and energy) or a broad measure that includes asset prices.
I am also not particularly sympathetic to the latter position I tend to believe it provides the central bank with too much influence in directing capital allocation decisions. Still, I recognize the opinions of those who believe that capital was essentially wasted during the internet bubble or, more recently, by excessive investment in residential housing. Note that the waste was likely greater in the former due to the more rapid depreciation of technology.
In any event, it appears clear that dynamics in the housing market helped depress measured consumer inflation until recently and now those same forces are working against the data. If the Fed were to be consistent, then they would not discount the inflationary impulse of rising OER. Indeed, they seemed perfectly happy with the inflation figures that were depressed by low OER growth."
Best Wishes.
"Just wanted to say I love the site"
I second that motion.
Don't worry, the Banana Republicans will spin everything going forward to make sure people are looking at "Core Core" Inflation, in other words, core inflation excluding the boost from rents, both "rent rent" and OER. In other words Kudlow and Co. will spend lots of time talking about the inflation picture faced by a anorexic homeless person who owns no car. This would be historic in that it would be the first time that anybody on the GOP side ever showed any concern about the homeless.
CR-
You (and others) have previously mentioned the importance the Fed tends to place on core PCE, which you pointed out jumped the most in 12 years...so what are we to make of today's market movements as well as this report? Do you foresee stagflation? Will they raise again in August, or pause? If the decision really is dependent on incoming data, with a core PCE increase like that, I think they have no choice. I think GDP will suffer no matter what they do simply because of housing slowing, so it's just a quesiton of how much support they want to give the dollar...
I meant "...no choice but to raise."
Nikki, the FED has said that they believe the slowing economy will take pressure off inflation. Even though the current numbers (2.9% core PCE) are way too high for comfort, the FED may think that is the high point for this cycle - and the previous rate hikes will be enough. Still, my guess is they will raise 25 bps again on Aug 8th.
I'm looking forward to the future expectation numbers
on Monday.
Best Wishes.
Bob: And yet the markets rally.
I'm not sure I'd call the volatility we've seen in the stock market lately "rallying." It makes me nervous, and I've generally got a very strong stomach.
I suspect the market is only going to continue moving essentially sideways for quite a while longer, possibly until we get a new president. But I could be (and hope I am) wrong -- with the housing market no longer looking like guaranteed overnight asset appreciation, maybe Americans will start investing in stocks again.
The "markets" are rallying because they think the FED is going to "stop" if that means anything.
If the FED doesn't stop, I could see a massive drop Augest 8, if they are that set on stoppage is likely and it doesn't happen, things could turn ugly. BB still needs his own stock crash lol...............
I just went a lot more conservative. I'm thinking stocks have been reverting to their mean since 2001 bust -notice stock increases have been due to earnigns and not multiple expansion. However, there is one more correction to go (due to consumer lead recession) and then stocks will be below their long term average P/Es and we will be set up for a long term bull market.
When looking at house price appreciation whether and with what we "adjust" it is highly dependent on what information we're looking for. If you're looking at consumers MEW-ablity, nominal apreciation is more important than real appreciation. If you're looking at long term trends in housing affordability, you should probably adjust for wage growth rather than CPI. And you should look at costs for a "standard" 30 year 20 down fixed.
I'm sympathetic to the idea that OER is a measure of housing consumption, but I'm very unclear how they calculate it given that the rental stock is so different than owner occupied stock of housing. ISTM that however you adjust for that fact could lead to inacuracies.
"Nikki, the FED has said that they believe the slowing economy will take pressure off inflation."
I think this is wishful thinking if oil prices stay at their current levels. Even if they level off, the full price impact from years of high energy prices has yet to fully be felt, IMO. The Fed obviously has no control over that aspect of inflation that trickles down to the core number, but it's still inflationary nonetheless. Do they just ignore this, as NZ is apparently trying to do, or will the wage inflation that is finally starting to occur force their hand? As long as credit standards aren't tightened and the money supply continues to grow, it's hard to see how inflation will go away. Hopes and prayers don't preserve the value of my dollars.
NOVA Fence Sitter, I hope you're right about the long term bull market down the road, because I'm sick and tired of not making any real money for the past five years. I'm generally bullish overall -- but my Pollyanna attitude is starting to feel frayed lately.
The FED does not care about inflation. Helicopter Ben is just acting tought. As soon as the economy starts to rollover via housing he'll be cutting rates.
Just look at the FEDs record since Greenie took over...
"largest quarterly percentage increase in core PCE since 1994"
Check out the rates
in '94. They were constantly upping them. In November they went up .75% to 5.5%, and in February of '95 added another .5 to bring it to 6%. And this is for comprable core numbers (present vs '94). I'm virtually certain the food & energy inflation NOW is greater than a decade ago.
Also, the '94 increases were under Easy Al. Is Ben easier?
Of note, those last two 94-95 hikes took place after the election. Might Ben wait as well?
Notice the early 90's slump, the FED put the discount rate down to 300bp's, then when the growth picked back up in 94, he hiked up to 600bp's which cooled the economy during the second half of 95, before settling down 500-525bp's mostly when the dot.com craze went wild in 96-99.
So, does the FED think this economy can grow in a 5.25 enviroment with a dying Real Estate bubble....like 96-99? Different eras, different challenges, different monetary conditions, Greenspan will get a lump of coal from Bernanke in his stocking this Christmas lol!!
"Still, my guess is they will raise 25 bps again on Aug 8th."
Mine too, CR. Interestingly, the equity market seems to be arguing that, even if there's 1 more raise, life will be fine. Hardly the response one might expect from doom-sayers. Or, do they have a better idea? For instance, how would economic prognostications change if oil dropped to $50?