Looking at the Economy Through Gray Colored Glasses

Econophile's picture

By Jeff Harding of The Daily Capitalist

I try to balance my day by reading well known optimist and pessimist economists. My two favorites are Brian Wesbury of First Trust in Chicago as my “Mr. Sunshine” and Dave Rosenberg as my “Joe Btfsplk"* (the name “Dr. Doom” was already taken by Nouriel Roubini). I know what to expect of them every day.

I like Rosenberg, formerly the chief economist at Merrill Lynch (remember them?) before he moved to Gluskin Sheff. Rosenberg raised the caution flags before the crash. Brian Wesbury didn’t. I saw Wesbury talk several times at conferences before the crash and he always said there was no problem with housing. He was cheerful throughout the crash and, back in May was one of the first economists to call the bottom. Also he is against mark-to-market accounting for financial institutions. Wesbury is a favorite of Kudlow, and is frequently published in Forbes.

Wesbury just published a report in which he argues that his prediction of a “V”-shaped recovery is coming true. Lots of charts showing obvious growth and improvement in the economy. The flaw in his argument is that he points to data that support his conclusions and ignores the ones that don’t. For example, he point to reports from the Richmond Fed and the NY Fed to show that their economies are picking up in their regions. I review data from Chicago and St. Louis and can point to sluggish growth there.

Rosenberg points to a drop in consumer confidence (unexpected), disappointing corporate earnings, and contracting bank credit.

Who’s right?

Wednesday the ADP jobs report came out and unemployment continues to increase, but at a slower pace (est. 9.8% unemployment from another 254,000 jobs lost). OK, everyone says employment lags a recovery. Got it.

But here is something that I think is important:

Company formation typically dips slightly in recessions, says Brian Headd, a Small Business Administration economist. Earlier this decade, business starts -- including new businesses and units of existing businesses -- fell 9% between the third quarter of 2000 and the first quarter of 2003, the BLS says.


This time, the decline has been steeper. Business starts fell 14% from the third quarter of 2007 to the third quarter of 2008; the 187,000 businesses launched in that quarter were the fewest in a quarter since 1995. The number ticked up slightly in the fourth quarter, the latest data available. But those new establishments created only 794,000 jobs, the fewest since the government began tracking the data in 1993.


The recession may have ended, but history suggests business creation won't rebound quickly. The 2001 recession officially ended in November of that year. But business starts didn't begin growing again until mid-2003. A sustained lull in company formation "could have huge implications for the economy down the road," Mr. Headd says.

If small business is the engine of the economy, then we’re in trouble because that’s where most of the jobs are. According to the ADP report:

The job losses were especially severe among small businesses with fewer than 50 workers. Those companies shed 100,000 jobs compared to the 93,000 jobs lost at medium-sized firms and the 61,000 lost at large employers with 500 or more workers.

This isn’t good. Tomorrow the BLS employment data comes out.

Here are a few other tidbits that Mr. Wesbury didn’t mention:

  • Consumer spending fell a revised 0.9% compared to the 1.0% decrease from previous estimates, but still worse than the 0.6% increase in the first quarter.
  • Consumer spending increased by 1.3% in August MoM.
  • Business spending dropped by 9.6%, up from earlier reports of a 10.9% decrease.
  • The Chicago Purchasing Managers' Index unexpectedly fell to 46.1 from 50.0.
  • Consumer confidence fell to 53.1 in September from 54.5 a month earlier according to the Conference Board Consumer Confidence Index.
  • Initial claims for jobless benefits rose by 17,000 to 551,000 in the week ended Sept. 26.
  • The ISM index for manufacturing activity in the U.S. slipped to 52.6 in September from 52.9 in August.

The important thing to note about the August consumer spending report is that it is a result of higher gas prices, back to school purchasing, and Cash for Clunkers. Except for the back to school spending (reportedly the worst season ever), these things represent an transitory effects, not a result of an improving economy.

The Case-Shiller housing report did improve, and, as I have been saying, housing is finding a bottom. But, as my new best friend, Richard Fisher, president of the Dallas Fed said:

"While housing is showing some signs of having reached a bottom, we need to recognize that it is a sector still on life support," Richard W. Fisher, president of the Federal Reserve Bank of Dallas, said Tuesday, according to excerpts of his speech. "The market for housing will not become truly robust until market forces replace the prostheses of government support."

Theory is everything in interpreting data. Everyone has one and through that lens, the data is filtered. My filter (basically Austrian) believes that we’ve been through the biggest credit cycle in the history of mankind and the resulting debt explosion needs to be liquidated or paid, and until this zombie debt is paid off, we won’t see a robust economy.

* A character from the comic strip “Li’l Abner” who jinxed everyone around him. He was pictured with a raincloud over his head.

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Econophile's picture

To Anonymous #86920:

If it were true that the solution would be to just let entrepreneurs make the right decision then explain why bankruptcies are on the rise and why the tech market folded in 2003. The point being that the Fed throws out false signals to entrepreneurs through interest rate manipulation and when the entrepreneurs find out that their growth was based on paper rather than real savings, they go belly up. Exactly what we're seeing. It's not theory, it's real. And if I were you, I'd be paying more attention to theory ("psycho-knowledgey" as you put it).

Econophile's picture

Anonymous #87025

Thank you for the excellent comment. I think I agree with most of what you say. Although I don't think these economists think they possess a priori knowledge, and that is the problem. They believe instead in empirical knowledge without an a priori basis,  as you obviously know, and they would be of the Historical School of economic theory (going back to the Methodenstreit debate). I believe you know all this from your excellent comment. I don't want to bore readers who aren't into this great epistemological debate, or the ideas of Mises and Hayek, but it's fun to discuss this with someone who understands the arguments.

I also understand your pessimism about current events. While I understand that history is on the side of statism because of leaders' propensity for power despite the results of their policies, I have hope and that is why I started my blog, The Daily Capitalist.  I think events like these are polarizing and, as I see it, while we seem to have lost a place at the debate table, the free market movement has gained many, many followers who can think for themselves. The growth of Austrian based economists in academia has been growing and growing. Also, it seems most of the Austrian economists got it "right" as opposed to the Keynesians and Monetarists who missed calling the crash. So, I plug away at it, trying to present my free market ideas at a "retail" level by showing the failures of Keynes and socialism through economic analysis without necessarily getting into theory. And, I can tell you, it's getting easier and easier to point out the failures, much to our misfortune.

Anonymous's picture

May i coin the word psycho-knowledgey?

To whit, well informed entrepreneurs will invest their time and money when they believe they can make a profit.

Notice well-informed contretemp believe. Do not sell icecubes in Eskimo land!

40muleteam borax

Econophile's picture

Pondmaster: Ageist! Why, I am in the prime of my life. Let's just say that I've seen lots of cycles.

Happy Days: Great observation! If MBAs were thrown into the Pits before they did anything else we would be better off. Now that I think about it, what a great idea.

Also, I skirted the issue behind this post -- how do we know what we know? The real answer about economists is that they think they know an unknowable.


Anonymous's picture

Econophile: excellent work.
But, the real problem is that economists believe they
possess a priori knowledge of too many variables,
leading them to believe they "know" (not think!) the unknowable. This fallacy of logic and reasoning leads
to the arrogance of their continued failures in
predictive forecasts within highly stochastic and vastly
manipulated: government actions and markets.

The ultimate problem with: economists, rating agencies,
The Fed, Treasury, Regulatory agencies, Congress,
banks, insurance companies, car companies, mortgage
GSE's and, all the other bailout recipients (and, CNBC
and Cramer) is this: there is no penalty, no consequences for failure! Few have lost their jobs because of their
past and present failures. No one has gone to jail for their actions (or lack thereof). Moral hazard has
been blown away in a land where debt and deficits no
longer matter - until they do - but that is somewhere
in the distant and "irrelevant" future.

Obama, Government and Congress have failed over and over to understand that doing nothing was, and is, the wisest choice at this late stage of "event discontinuities."
But, when you have a financial oligarchy, enmeshed
within a political kleptocracy, that is bailed out of
ALL of it's failures, at taxpayer expense and further enriched and emboldened, then you have arrived at a
fascist state. And that is a very dangerous place.

In your question, "... I skirted the issue behind this
post-- how do we know what we know?", lies the real
conundrum of this entire misbegotten mess - for all of
the above offenders I have listed - it does not matter
what they know or, we know. Why? Because "we" who do
"know" even some of what is happening, are still of such insufficient numbers with no real power, that they do
not fear us. And until they do fear us, the lies and manipulation will continue and nothing will change.
That is the point. Destroy the wealth of the nation's citizens by transferring it to the banks and the
corporations while debasing the currency until we become

My greatest fear is that "we" will not achieve a
critical mass soon enough to stop this madness before
we reach a "global bifurcation" point that leads to a
systemic collapse. (See: Humpty Dumpty & Weimar Republic)
Then, no one wins, game over.

Anonymous's picture

Why do economists get it wrong? There is but one employer of most 'name' economists... The government / fed / maybe academia. You going to say anything your employer doesn't agree with... where are those black helicopters again?

Happy Days's picture

"Why do economists keep getting it wrong?"

A "small" observation from being a floor trader (bonds). The more

"education...college" one had, the poorer their performance on the

floor. I am not knocking those with higher education...but on the floor

it is generally useless. They would discuss all day long how this should

move and that should move...the market, to them, had to follow a

script to satisfy their ego entrenched minds. The best thing to do

was to trade against them. When they wanted to buy...you'd sell it

to them and vice versa. Great system. The market is not logical...

one must stay in the now moment and go with the flow....not with

what you "think" it should do based upon one's "education". The ones

with MBA's and the like were great to feed off of....believe me. They

all blew out in 6 months or less. Now we get to economists. They

have their masters and PHD's....just put them in the "pit" and I'll

bust them out in short order. That piece of paper they paid dearly

for is useless on the floor and useless (for the most part) in their

analysis. I've seen it first hand. To go with the flow is just too hard

for them to deal with, I guess. Too simple...and funny thing is..is

that simple works for trading. Trying to develop mathematical models

that involve stuff I can't even pronounce right is a hopeless endeavor...they

may work for a while...but all fail in the end. All...because any

model can't anticipate "the event"...the asteroid with planet earth's

name on it. It's the way it is. Have a great weekend all!!!

bonddude's picture

I agree with the premise that most highly educated "traders" ignore what is in front of their face,and are more biased by their background. As one without a degree, I understand this too. Those without degrees generally learn the business from the bottom up, learning how the business really works by being back office, margin clerks, etc... and then trading assistants and then traders or brokers.

But I don't think this can even happen anymore with the state of financial companies. Nevertheless, rather than just trade it doesn't seem hard to divine macro trends in the economy especially if you've been around the business for 30 years.

Back to the economy, here's a girl that has nailed it. Ms. Whitney.


Daedal's picture

"OK, everyone says employment lags a recovery. Got it."


Indeed. Further, spouting that employment lags doesn't tell us the time period for that lag, nor the subsequent economic growth, or lack thereof.

In other words, even if "employment lags" is established as always being true, it doesn't really tell us anything useful.

Pondmaster's picture

Econophile -

Your even having a clue about "Joe Btfsplk" is very telling of your age . I am 54 and my father told me about Joe in the "funny papers" - Lil Abner stirp was discontinued in 1970 or so wasn't it .. ?

Good post - Both sides are good practice to view in economics


Grand Supercycle's picture

" Who’s right? "

Ask the charts.

T/A works.

I warned of an impending stockmarket crash back in *early 2007*




Hephasteus's picture

And our leaders have a tenacious talon grip on us. Of course they grip harder in Europe which is probably why they are fighting back more and losing.


Gordon Brown was supposed to lead them into the global economy scam but looks like he's getting some trouble.