- by New Deal democrat
There is an economic blogger who is currently hitting top of the lists at the place
Bonddad and I hail from, on the theory that the "crashing" of the
ECRI leading indicators makes it a sure thing that we are entering a double-dip recession.
What the
ECRI indicators mean, may or may not be true. But here is the
very same blogger, last October 9, in response to an article posted at the
Wall Street Examiner's website that noted that
ECRI's "Index of future U.S. economic growth slipped in the latest week, but its yearly growth rate climbed to a new record high, indicating a smooth recovery in the near-term":
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Oct 2 2009, 12:02 PM
"a new record high"??
Unemployment is increasing, many other indicators are turning down, and we are in the deepest recessions since the Great Depression, but their indicator is hitting a "new record high"?
Doesn't that fact automatically discredit them?
In other words, 9 months ago
ECRI's index, when bullish, was scorned as "automatically discredited" but now, when bearish, is embraced as the very pinnacle of oracular wisdom. With not the slightest explanation from the blogger in question as to what he may have learned about the index in the interim, or any other reason why -- except, of course, that they now can be cited in support of Doom.
This, by the way, is the same blogger who wrote of the oncoming "foreclosure tsunami" three months ago when
RealtyTrac reported a spike upward in their data. Since, then both the raw number and the
YoY comparison have decreased. The only reason to highlight the report then and ignore it since is whether or not it supports a
pre-existing opinion.
This is from
Bonddad:
This same blogger recently stated the Baltic Dry Index signaled the coming of a double dip. Actually, a little bit of perspective and research will help to clear the air here.
Above is chart of the index from
investmenttools.com Notice the index has "crashed" three times over the year. Despite this incessant crashing, the US has had three quarters of economic growth along with the rest of the world. In other words -- this is a volatile index because it is tied to the commodity price cycle.
However, as the Economist points out, there is another reason for
the latest "crash:"There are growing doubts, however, about what the Baltic Dry is actually signalling. The confusion is whether the index is saying more about the supply of ships than the demand for their cargoes. The index spiked dramatically in 2008 as China’s imports of commodities soared at a time when the supply of ships was constrained and port congestion added to demand for capacity (see chart). The financial crisis soon caused the index to fall back but not before this period of dramatic growth in demand from China had prompted a surge of orders for bulk carriers, especially the very largest ones that are used on the China trade routes. These ships take around three years to come on-stream. Despite the cancellation of some orders the new ships are now flowing in: in the first half of this year the global fleet increased by 23% as new vessels came into service at the rate of 16 a month. There are now 23 such vessels arriving each month, adding to oversupply.
Other freight indicators are less negative than the Baltic Dry. Container-shipping rates are holding pretty steady as companies decide to accept a lull in traffic rather than cut rates to stimulate demand. And according to the International Air Transport Association, an airline grouping, air freight is booming, up by 34% in May on a year-on-year basis. But air freight measures trade in high-value finished goods, whereas bulk ships reflect demand for the raw materials of which they are made. If there is more to its decline than supply-side distortions, the Baltic Dry could yet be a grim warning of what is to come.
In other words, we have the following fact pattern.
1.) Several years ago when China was buying a ton of commodities, shippers ramped up orders for ships.
2.) The economy hit the great recession.
3.) These orders for new ships went forward.
4.) Now there is an increased supply of ships.
5.) Increased supply lowers prices.
A little research can save a lot of panic.
Back to New Deal.
I cite the above blogger not to single him out, but only as an example, because this is something that is constantly seen in the
econo-
blogosphere. Commentators select only those indicators which support their
pre-existing point of view. Further, readers do not read a blogger critically. They do not track whether the blogger gave the indicator or expert the same weight when he/she/it pointed in the opposite direction.
Rather, they read a blogger to confirm their own pre-existing views. That's called
"confirmation bias" and it is the fundamental problem with their claims of "fundamental analysis."
Confirmation bias on the part of his readership is exactly why my co-blogger, Bonddad, was celebrated as a guru when he was bearish, but reviled as a "corporate shill" when he turned bullish in late spring of 2009 -- even though he was correct.
As for me, I try to simply and consistently go where the numbers take me, good or bad, and generally speaking to K.I.S.S. about those numbers which have in the past worked particularly well correlating with others in the business cycle. I do have opinions about the long term (we're in what I started to call a "S l o w M o t i o n Bust" back in 2007, that has not resolved yet), and I'm sure I'm far from perfect in my goal, but as to the immediate future I try to let the numbers tell me rather than impose my preconceptions on the numbers.
As to ECRI, they made a gutsy and correct call in Spring 2009. Their indicator deserves a lot of respect. The longer it stays down, the more it suggests a downturn. But because the numbers are strongly affected by one series -- the crash in purchase mortgage applications after April 30 -- they might whipsaw. So I am being cautious.
This in Bonddad again.
NDD brings up a really good point. Here is my two cents.
The economic blogsphere got the crash/recession right and for that they deserve a ton of credit. But since the economy started printing positive numbers, the economic blogsphere has done everything possible to ignore or discredit the numbers. The lines of argument have gone something like this:
1.) One number isn't important compared to all this negative data.
2.) 2-3 months don't make a trend.
3.) That number isn't important; this other one (that is negative) is important.
4.) The positive numbers are completely fabricated; the negative numbers are sacrosanct.
It's been like watching a paranoid schizophrenic find justifications for his delusions.
Here are the facts: the economy has been expanding for three quarters, and will probably print a positive numbers in the fourth quarter. Real PCEs are increasing, manufacturing is expanding, exports are increasing. That's what the data says. No matter how you try and wash it away, that's what's happened. I don't know what to tell you if that doesn't fit in with your preconceived notion of what happened.
However, as NDD and I have both pointed out, the economy faces headwinds. I believe he is more bearish than I am. I see growth in the 1%-2% range for the rest of the year. That does mean I am no longer as bullish as I once was. The reason for that change is simple: the data softened. Anyone who tells you they can make a firm prediction and hold to it for longer than three months is lying to you. Again -- that's the way economics works.
