The Unassuming Economist

From The Economist magazine:

“They perform far better when forecasting growth years than downturns

SOME INVESTORS worry that America will face a recession in the next few years, after one of the longest expansions on record. Stock indices have fallen by 10% since early October. Yields on short-term government bonds exceed those of some longer-dated ones, often a harbinger of a downturn. Despite this, economic forecasters project GDP growth of about 2% in 2020.

How much confidence should one have in these predictions? For the past 20 years The Economist has kept a database of projections by banks and consultancies for annual GDP growth. It now contains 100,000 forecasts across 15 rich countries. In general, they fared well over brief time periods, but got worse the further analysts peered into the future—a trend unsurprising in direction but humbling in magnitude. If a recession lurks beyond 2019, economists are unlikely to foresee it this far in advance.

Economies are fiendishly complex, but forecasters usually predict short-term trajectories with reasonable accuracy. Projections made in early September for the year ending four months later missed the actual figure by an average of just 0.4 percentage points. Errors rose to 0.8 points when predicting one year out. But over longer horizons forecasts performed far worse. With 22 months of lead time, they misfired by 1.3 points on average—no better than repeating the previous year’s growth rate.

 

The biggest errors occurred ahead of GDP contractions. The average projection 22 months before the end of a downturn year missed by 3.7 points, four times more than in other years. In part, this is because growth figures are “skewed”: economies usually expand slowly and steadily, but sometimes contract sharply. As a result, forecasters seeking to predict the most likely outcome expect growth. However, they adjust too slowly even once bad news arrives, says Prakash Loungani of the IMF. That suggests they are prone to “anchoring”—over-weighting previous expectations—or to “herding” (keeping their predictions near the consensus).”

Read the full article here.

A separate article from Bloomberg says that:

“Recession Signs Hard to Miss If Stock Message Is Taken Seriously

Prices bounce around, emotion obscures logic, signals appear and vanish. The reasons for treating equities as a poor barometer for the economy are many. Right now, that might be for the best.

Pools of gloom await anyone looking for a message in stocks. There’s the $3 trillion in value erased, the bloodbath in banks and the trouncing in transports. In wonkier circles, shrinking valuations and negative rolling returns have started to ring the recession bell. A relatively calm week in the Dow Jones Industrial Average just ended with a 495-point thud.

It’s a pastime on Wall Street these days to look at the carnage, add it all up, and announce that the market is wrong. But what if it’s not? After all, even if equities have predicted “nine of the last five recessions,” as the economist Paul Samuelson famously said, that’s a better record than a lot of humans.

(…)

Sure, markets overshoot, and sentiment gets carried away. Corrections like this one have occurred six other times since the bull market began in 2009. They all sparked growth scares. But none of them a recession.

“The market is wrong,” said Anik Sen, global head of equities at PineBridge Investments. “Clearly it has been a slowdown, but the slowdown can be very transitory in our view. At the end of day, there is enormous pent-up demand, whether it’s capex or technology spending. None of that has changed.”

Still, anyone heeding strategist calls shouldn’t forget Wall Street’s propensity to lean bullish. Over the past two decades when stocks suffered two bear markets, professional forecasters have never once predicted a down year. Economists don’t see one now, either. Eighty-nine surveyed by Bloomberg generate an average prediction of 2.6 percent growth in gross domestic product next year.

Meanwhile, a 2014 study by Prakash Loungani of the International Monetary Fund found that not one of 49 recessions suffered around the world in 2009 had been predicted by the consensus of economists a year earlier. Loungani previously reported that only two of the 60 recessions of the 1990s had been anticipated a year in advance.”

Read the full article here.

Also, see a related note on “There will be growth in the spring”: How well do economists predict turning points?

On cross-country:

• Global House Price Index-Q3 2018 – Knight Frank
• Border Effects in House Prices – Real Estate Economics

On the US:

• Special Issue: The Appropriate Role of Government in U.S. Mortgage Markets – Federal Reserve Bank of New York
• Shiller Hystericizes The US Housing Market – EconoSpeak
• Minneapolis 2040: The most wonderful plan of the year – Brookings Institute
• Minneapolis, Tackling Housing Crisis and Inequity, Votes to End Single-Family Zoning – New York Times
• Income Inequality, Mortgage Debt and House Prices – London School of Economics
• More Than a Third of American Households Were Cost-Burdened Last Year – Harvard Joint Center for Housing Studies
• Risk is building in the housing market – American Enterprise Institute
• Connecting the dots on home builder performance – American Enterprise Institute
• Homelessness Rises More Quickly Where Rent Exceeds a Third of Income – Zillow
• Progressive Minneapolis Just Passed One of the Most Deregulatory Housing Reforms in the Country – Reason
• Housing Sentiment Up Slightly on Reported Household Income Gains – Fannie Mae

On other countries:

• [Australia] The potential of new technologies to disrupt housing policy – AHURI
• [China] House prices and marriage entry in China – Regional Science and Urban Economics
• [Thailand] Thailand’s house prices rising strongly again – Global Property Guide
• [United Kingdom] Property prices where you live compared to where you work – Financial Times 

Photo by Aliis Sinisalu

From Bob Shiller on the US housing market:

On the current housing boom:

“(…) this is the United States’ third biggest housing boom in the modern era. (…) All we do know is that prices have been roaring higher at a speed rarely seen in American history.”

On possible explanations:

Low interest rates: “There is some apparent merit to this view, since these three biggest nationwide housing booms all included very low interest rates. But the market reaction to interest rates is hardly immediate or predictable. The housing market does not react as directly as you might expect to interest rate movements. Over the nearly seven years of the current boom, from February 2012 to the present, all major domestic interest rates have increased, not decreased. So, while interest rates have been low, they have moved the wrong way, yet the boom has continued.”

Economic growth: “Another explanation is simple economic growth. But, as a matter of history, prices of existing homes—as opposed to the supply of newly built homes— have generally not responded to economic growth. There was only a 20% increase in real prices of existing homes in the 50 years from 1950 to 2000 despite a sixfold increase in real GDP.”

Return to normal: “The simplest narrative being given for the current boom is just that the 2008-2009 financial crisis and the so-called Great Recession are over and home prices are returning to normal. But that explanation does not cut it either. In September they were 11% higher than at the 2006 peak in nominal terms, and almost as high in real terms. This is not a return to normal, but a market that appears to be rising to a record.”

President Trump: “It is difficult to assess the contribution of President Trump to the current boom. (…) The Trump administration’s attitude toward housing is less clear. President Trump’s slogan “Make America Great Again” has overtones of the “American dream.” But provisions of his Tax Reform and Jobs Act of 2017 were unfriendly to homeowners.”

From a new IMF working paper by Longmei Zhang, Ray Brooks, Ding Ding, Haiyan Ding, Jing Lu, and Rui Mano:

“China’s high national savings rate—one of the highest in the world—is at the heart of its external/internal imbalances. High savings finance elevated investment when held domestically, or lead to large external imbalances when they flow abroad. Today, high savings mostly emanate from the household sector, resulting from demographic changes induced by the one-child policy and the transformation of the social safety net and job security that occured during the transition from planned to market economy. Housing reform and rising income inequality also contribute to higher savings. Moving forward, demographic changes will put downward pressure on savings. Policy efforts in strengthening the social safety net and reducing income inequality are also needed to reduce savings further and boost consumption.”

From VoxEU:

“The Industrial Revolution has been of vast benefit to humanity, but it came at the cost of a global explosion in anthropogenic emissions of greenhouse gases. The UK was the first country into the Industrial Revolution. Now it is one of the first countries heading out, with annual CO2 emissions per capita back below the levels of the 1860s. This column presents an econometric model of UK emissions over the last 150 years to establish what has driven them down and reveal the impacts of important policies, especially the Climate Change Act of 2008. Even so, large reductions in all the UK’s CO₂ sources are still required to meet its 2050 target of an 80% reduction from 1970 levels.

The Industrial Revolution began in the UK in the mid-18th century for reasons well explained by Allen (2009). With antecedents in the scientific, technological, and medical knowledge revolutions from two centuries earlier across many countries, the UK was the first country to industrialise on a large scale. The consequences are startling: 250 years later, real income levels per capita are about seven-fold higher (https://ourworldindata.org/economic-growth shows even greater changes in other countries), many killer diseases have been tamed, and longevity has approximately doubled. As Crafts (2002) showed, the average individual would be unwise to swap their life now for that of even one of the richest people several centuries ago; the Industrial Revolution and its successors have been of vast benefit to humanity.

An unintended consequence has been an explosion in atmospheric carbon dioxide and other greenhouse gas emissions. These are by-products of energy production, manufacturing, and transport (all about a quarter of emissions), with agriculture, construction and waste removal creating most of the rest. Although the UK’s first electricity generating power station in 1868 was hydro driven, coal-fired steam-driven power stations were introduced by 1882 and have since produced most of its electricity. The paleo-record over the last 750,000 years of intermittent ice ages shows atmospheric CO₂ levels of between 180 parts per million (ppm) and 300ppm, but these levels now exceed 400ppm. The increases in atmospheric CO₂ recorded since 1958 at Mauna Loa (Sundquist and Keeling 2009) are clearly anthropogenic in origin (e.g. Hendry and Pretis 2013). The climate change induced by increased greenhouse gases has potentially dangerous implications, highlighted by Stern (2006) and recent IPCC reports, leading to the agreement in Paris at COP21 to seek to limit temperature increases to less than 2 Centigrade, and “to pursue efforts to limit it to 1.5C’’.  Much remains to reduce CO₂ emissions towards the net zero level that will be required to stabilize temperatures at any level. Meinshausen et al. (2009) analyse the difficulties of even achieving 2C, but renewable technologies offer hope of at least further large emission reductions.

However, there was a dramatic drop in the UK’s per capita emissions of CO₂ by 2017 to below the levels of the 1860s – the country first into the Industrial Revolution is one of the first out. On 22 April 2017, Britain went a full day without turning on its coal-fired power stations for the first time in more than 130 years, and on 26 May 2017 it generated almost 25% of its electrical energy from solar. The UK’s CO₂ emissions are now just half of their peak level in 1970. How was this reduction achieved?

UK CO₂ emissions

The data from 1860 on UK CO₂ emissions, fossil fuel volumes, and the ratio of CO₂ emissions to the capital stock are shown in Figure 1. While other greenhouse gas emissions matter, CO₂comprises about 80% of the UK total, with methane, nitrous oxide, and hydrofluorocarbons (HFCs) making up most of the rest in CO₂ equivalents. However, various fossil fuels have different CO2 emissions per unit of energy produced and depend on how efficiently fuels are burnt, from an open fire through vehicles, to a gas-fired power station.”

 

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