View From a Height
Commentary from the Mile High City
Wednesday, December 17, 2003

The Economic Picture

The Wall Street Journal has a page showing the main economic indices, with links to the most recent government report for that statistic. We tend, as news consumers, to get these numbers piecemeal. Unless you really make a point of following this stuff, the reporting is just too granular, and comes freighted with the interpretations built in. Not only can't you put a picture together, you don't even know where the edge pieces are.

First of all, the economy has been growing for two years now. Secondly, despite ongoing cries of a "jobless recovery," which we hear during the opening stages of any recovery, the unemployment rate has been declining for almost half a year now. There's also an interesting correlation between the two.

Both sets of sales had been growing through 2002, but really took off in the last half of this year, the same time that unemployment began to drop significantly. Also, note that even 2001 wasn't really that bad, even though September saw a drop in both numbers, naturally.

These last three are fascinating. Throughout 2001, 2002, and 2003, retail sales grew steadily, accelerating a little during this year. Ignoring the drop in 9/01, and the rebound as people started buying again in October, it's a pretty steady curve. That's what's show in the consumer spending graph, too. The numbers fluctuate in a narrow, 0-1% band right around 0.5% per month increase, again with an anomaly for September and October 2001. At the same time consumer confidence is dropping, rebounding in early 2002, and coming back some this year from further drops. What's going on here?

What's going on, I think, is that the two statistics measure different things. Consumer confidence measures an abstraction. "How do you feel about the future of the economy?" or even "How do you feel about your personal financial future?" are abstractions, and closely related to each other. People will form their opinions about the economy based on news reports. These reports have been continuously, relentlessly gloomy, even as the charts show more or less continuous improvement. So if someone asks about the future of the economy, people will respond with their mood based on the adverbs used to describe the charts. Here's the methodology.

Actual spending, though, is a concrete action, and you only spend money you have (or, if you're foolish, you think you will have). So that continues to increase, even as people abstactly worry about the economy. In fact, unemployment, although it certainly hit me personally, never got that high for the economy as a whole, although whenever that number's going up, jobs are hard to find. This corroborates the data. People were worried about the abstract "state of the economy." but since most of them hadn't lost their jobs, they tended to keep spending.

Ahhh, here's the tough one. Because we're all kind of mercantilist at heart, aren't we? Ask Paul Craig Roberts. This news about a new southward extension of NAFTA must be killing him. And, to be sure, a $480B trade deficit sounds like a lot. Until you realize that we have an almost $12 trillion economy. This is not to say we're immune from the Financial Forces. We're not. But it's the key to understanding what's been going on with the dollar, and where some dangers may lie.

The only way to pay for these deficits is with dollars that foreigners buy. But direct foreign investment has been falling the last half of this year. As a result, we sell the dollar more cheaply, offering more of them to foreigners. That's why the dollar has been falling. One way of attracting more foreign capital is to raise interest rates. If people in Japan see that they'll get a better return on their dollars, they'll buy more of them. At this point, though, the Fed is committed to low interest rates, so the dollar will probably keep getting weaker. This makes imports more expensive, which could fuel inflation. I have to believe that if the US economy continues to grow at anything like 4-5%, it'll be an attractive place for foreign capital.

And unlike China, you can actually believe our numbers.

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