Wednesday, February 15, 2012

Economic Fog at DK

- by New Deal democrat

There is a typical Doom and Gloom diary on DK which of course immediately hit the Wreck List (it's probably at the top by now), which once again demonstrates the ease of cherry-picking bearish data.

I'm away from my ability to post graphs, but I wanted to point you to the problems with that post.

1. The Baltic Dry Index. This index was said by the same person to be part of The crashing of the Leading Indicators in July 2010. If you don't remember the double-dip recession of 2010, that's because it didn't happen. This diarist never mentions when the Baltic Dry Index is rising, only when it falls. And it's current decline isn't even remotely close to the decline it experience during the "great recession," as demonstrated in graphic form in a great smackdown by Joe Weisenthal of Business Insider.

3. Electricity Usage. This is a graph that comes from a gold-bug site,, where when it was posted it was roundly ridiculed. It is the type of graph which "proves too much." There were declines very similar to this past month's in January 2011, in spring 2003, and in 2005 when the last economic expansion was at its peak. Needless to say, in none of those cases did a recession ensue. Until we have an explanation for why "this time it's different," why should we think a recession is heralded now -- especially given the warm winter in many parts of the country (less need for gas or electric heat). (Update: Also, this diarist has been bearish for at least 3 years, so why wasn't this metric ever mentioned by the diarist when it was rising? Why is it only a worthwhile statistic now?)

3. Petroleum Usage. This graph also "proves too much." It shows a relentless strong decline since 2007. Have we not seen improvements in GDP, employment, income, sales, and production at least since the end of 2009? Apparently this graph was perfectly capable of plummenting for the last two years of growth, why would it be different now? In fact, there are many signs that Americans are embracing various forms of conserving gasoline (I hope to have a post up on that within the week) and this is the primary driver of the decline.

4. Housing prices. It is housing starts, not prices, that are the important driver of the economy. Building more new houses has a strong multiplier effect that filters through the economy over a 1 to 2 year period. That is why housing starts or permits are long leading indicators for both the Conference Board and ECRI. The price of houses themselves -- that show more and more signs of stabilizing nominally -- do not give us any particular window into whether economic activity will rise or fall. (Update: Meanwhile, housing starts and permits have been at 3 month highs in the last two months. I guess that wasn't worth mentioning either).

5. Labor participation rates. The notion behind this graph was thoroughly debunked by our own Silver Oz's post on Monday. We know that younger people are staying in school longer, and we know that even with the bump-up in Boomer participation, the force of demographics is driving much if not most of the labor participation data.

6. Withholding taxes. The graph posted is UNadjusted for the 2% payroll tax reduction of 2011. Unsurprisingly, over that year, the comparisons with the year before without adjusting for that loss deteriorated. In fact, if you go to Matt Trivisonno's blog, you can see an original of a graph looking just like the one at DK -- followed by a graph which DOES account for the change in wittholding. That graph was up 8% YoY as of November 2011. Since January 1, 2012, we haven't had to make YoY adjustments because the payroll tax has carried over. 28 reporting days into 2012, $232.2 billion has been collected vs. $208.9 billion in 2011, better than a 10% improvement. (Update: Again, why wasn't this statistic worth mentioning while, in the diarist's own graph, it was positive and rising? Why is it only worthwhile now?)

I know my economic analysis is boring, because I go back and look at the same indicators over and over and over again, and I try to faithfully report if they are positive or negative. It's remarkably easy to cherry-pick data that supports a strictly bullish or bearish case, but that doesn't make it correct. In fact there is a big negative in the economy right now that is totally overlooked by that diarist -- the fact that wages haven't kept up with inflation for more than the last 12 months. But the "dark clouds" unfortunately embraced by the choir at DK are in fact just fog.

P.S.: I don't have to "disprove" the diarist's graphs. The diarist is the one claiming they consitute economic "dark clouds." I have shown that they are consistent with any number of scenarious. Once again: why are they only noteworthy to that diarist when they are falling? Why wasn't he writing bullish diaries as the BDI, withholding taxes, and electricity usage, per his graphs, were going up?