Friday, July 09, 2004
There was an old joke at the beginning of the Reagan Administration that the only woman in the Reagan cabinet was Miss Rosy Scenario. Some folks seem to be channelling David Stockman that we're going off a cliff soon (fools! don't you see it!?!) but I have to confess to being one bearing glad tidings for the economy, and a belief that it will redound to Bush's credit by November. Here are some reasons:
- Professional forecasters focus too much on each wiggle in the data. I'm fortunate in that I forecast from a university rather than a bank or consulting firm, because I don't get myself on reporters' Palm Pilots to offer quick quotes to every jobs or GDP report. You can certainly cherry-pick numbers to make things look good or bad. Data never go all in the same direction. Even when things go well, note how the press reports, like "U.S. Consumers Feeling Better Despite Disappointing Economic News". (Damn them!) Which leads me to...
- Aggregate data can conceal much. Last week I quoted some diffusion index figures for employment. I tend to look at 6-12 month figures for the share of industries that are gaining or losing workers. It's never going to be 100%, as I just said, but the recent data look pretty good here. Even in manufacturing, 53 of 84 industries have expanded employment in the last six months. We use these diffusion indices in the St. Cloud Quarterly Business Report, which I co-author. There too, firms are reporting solid gains. Again, not all. You can easily find a firm or two to tell a negative story, if that's what you want to find.
- Not all bad economic news is blamed on the incumbent. One of the stories running around right now is that if you aren't working, you're stuck in unemployment. That might be true. Here's a graph of unemployment duration since 1968 (the first year I could get this data from BLS):
This measures the number of weeks that an unemployed person stays unemployed. Peaks in this number occurred in 1976 -- Ford lost -- and 1984 -- Reagan won. There doesn't appear to be a clear pattern. And from research I've done, there doesn't appear to be any reason why longer unemployment causes blame for the incumbent. It is much more likely that those experiencing long-tern unemployment blame themselves.
- People watch the change, not the level. I mentioned that my dissertation looked at the rate of change in unemployment and inflation rather than their levels as being important to describe voting. The graph below shows the 12 month change in the unemployment rate since 1960 (data from BLS).
Notice that the two times incumbents have lost elections (Ford 1976, Bush 41 1992), the rate had no time to turn positive in the run-up to the elections. Bush's numbers have already turned positive, and given that the next four months to replace (July-October 2003) had employment changes of -111, +11, -47, and 83, the number is likely to turn even more positive as the election approaches, unless we really go off a cliff.
- Which we're not.The National Association of Business Economists has an industry survey of 104 firm and industry economists this week in which they note employment is performing very, very well.
Employment is booming. The net rising index (NRI, percent reporting rising demand minus percent reporting falling demand) rose to 22 percent from seven percent last quarter. This compares with a historical average of minus 2.5 percent; an NRI of 22 percent is in the top ten percent of historical responses. Hiring plans also improved, with those expecting to increase employment rising to 41 percent from 34 percent last quarter.Their May Outlook (which is a survey of professional forecasters) had only 2 forecasters predicting GDP below 4%. That's before the latest revisions to first quarter GDP, taking the number from 4.4% to 3.9%, and before the June employment report. But that's not necessarily going to mean much. My own forecast uses levels data rather than rates of change, and the impact of the changes were quite minimal. I will go out on a limb right now and say second quarter GDP comes in over 5%. And that money is filtering over into real disposable income as well.