The “Great Moderation” Lives

There’s an important paper you ought to read by an “only in America” pair of economists–one from France and one from Ukraine–who teach at US universities on the east and west coasts (William and Mary for Prof. Coibion and UC-Berkeley for Prof. Gorodnichenko). It’s short, fairly easy to read and is based on their longer and more complex article on the same topic, which will be in a forthcoming issue of the American Economic Review.

They conclude that we are likely to see a return to moderate growth with low inflation for many years to come as a result of better monetary policy since the Paul Volcker-led FOMC dramatically reduced inflation in the 1979-1984 period. Of course, it took two dramatic recessions (the 6-month one in 1980 and the 16-month one in 1981-1982) to accomplish the goal.

Since my long-term forecast is also for moderate growth (3.2 percent a year over the next decade) and accompanying low inflation (1.1 percent a year over the same horizon), this article resonates with me. I hope you enjoy it.

Good Inflation News and Fair Retail Sales Data

On October 15 the BLS gave us more good news on the inflation front. While the CPI for all urban consumers (CPI-U) rose 0.2 percent from August to September, that was only half the increase from July to August. Furthermore, the index was 1.3 percent below a year earlier.

The CPI-U excluding food and energy index rose 1.5 percent from September 2008. Energy prices were 21.6 percent below a year earlier and food prices declined by 0.2 percent over the same period. That’s the first year-over-year decline in food prices since April 1967. Click here to read the full post and comment (Insights subscribers) »

Update to the Outlook

This piece was written for a customer who deemed it too long for his use. So, since I hate to waste 2000 words–enjoy! Regular readers will note that there is some repetition here for you, but that’s because you’ve already learned this stuff while new clients haven’t.

It’s a hard cruel world out there with much economic turmoil and concern. Since August 9, 2007, the day that the huge French bank BNP Paribas (one of the 10 largest in the world with assets in excess of $1.3 trillion) told owners of shares in three of its mutual funds they could not redeem them “because we own bonds based on U.S. subprime mortgages that we can’t put a value on right now,” financial panic has spread around the world.

Nothing makes an investor madder or more scared than being unable to cash out his or her investment from a fund. This problem has recurred many times throughout history. A comprehensive documentation that is also a most delightful and interesting book to read is Manias, Panics, and Crashes: A History of Financial Crises (5th Edition) by Charles P. Kindleberger and Robert Aliber (ISBN 978-0-471-46714-4). This wonderful book, which has always been a huge hit with my MBA students in the several second-year elective courses when I’ve used it, covers the history of financial panics around the world from Kipper-und-Wipperzeit of 1619-1622 and the Dutch tulip bulb episode in 1636-1637 through the Asian collapse in 1997 as well as the Russian default and the collapse of Long Term Capital Management in 1998 and the corporate scandals of 2001-2003 (Enron, Worldcom and so on).

The Wall Street Journal had a lead editorial on September 16, 2008 (“Surviving the Panic”) referring to the usefulness of this book in understanding the current situation. You’ll feel better if you get a copy of the book and peruse it carefully.

Few people were sorry to see 2008 pass into history at the stroke of midnight on December 31. Many will be happy to see the end of 2009 as well because it has seen the largest decline in global economic output and international trade since the end of World War II.

The International Monetary Fund (IMF) in its October World Economic Outlook expects world output to shrink by 1.1 percent in 2009 after having grown 3.0 percent in 2008. They expect global growth of 3.1 percent in 2010 and for growth to average 4.4 percent a year in the 2011-2014 period. Click here to read the full post and comment (Insights subscribers) »

Some Good News on the Most Important Parts of the Economy

On March 2, BEA released some surprisingly good news on personal income and personal consumption expenditures (PCE) for January 2009. After four months of increasingly gloomy reports, the first data for 2009 looked much better.

Total disposable personal income, the raw material for PCE that accounts for over 70.0 percent of real GDP, rose to a record level of $8.9 trillion in January. That drove real PCE to $8.2 trillion, above the fourth quarter 2008 level.

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