MacroScope

An upward bias in jobless claims revisions

Weekly data on applications for unemployment benefits have gained renewed importance since a weak March payrolls number left economists wondering whether a tentative labor market recovery was about to cave again. The last two weeks’ readings were just soft enough to leave investors thinking the country’s unemployment crisis may not be healing very quickly.

Daniel Silver at JP Morgan has dug deeper into the claims figures and found a curious trend: a repeated and distinctive tendency toward upward revisions in the numbers.

There has not been a downward revision to the initial claims data reported for the prior week since the start of March 2011, and this recent streak is not a new phenomenon—there have been upward revisions in about 90% of the weekly reports since the start of 2008, as well as going back even further to the start of 2000. These revisions are relatively minor (usually adding only a few thousand claims) and do not change the broader trends in the data, but they can lead to the weekly claims reports showing decreases to the more recent levels, whereas if the prior week had been unrevised, the reports would have shown increases in claims.

What is the reason behind this? Silver identifies two possible sources: backdated claims and interstate applications, which take an extra week before they make it into the report.

As for what happened in the latest week — claims were revised up by 8,000 to 388,000. That’s just teetering around the level that economists believe separates an improving labor market from a deteriorating one.

The Law of Diminishing Greeks

The Law of Diminishing Returns  states that a continuing push towards a given goal tends to  decline in effectiveness after a certain amount of effort has been expended. If this weren’t the case, Usain Bolt would be able to run the mile in  less than 2-1/2 minutes.

From an economic standpoint, this law now seems to be fully in force in Greece. The latest jobs figures from the twice-bailed out euro zone country paint a bleak numerical picture of the impact of unrelenting austerity in ordinary Greeks, regardless of whether it was self-inflicted or not. To wit:

More than one in five Greeks is unemployed.

There are more young people without a job than with one.

The record 1.08 million people  without work in January was a  47 percent tumble  in a year.

Central bank balance sheets: Battle of the bulge

Central banks across the industrialized world responded aggressively to the global financial crisis that began in mid-2007 and in many ways remains with us today. Now, faced with sluggish recoveries, policymakers are reticent to embark on further unconventional monetary easing, fearing both internal criticism and political blowback. They are being forced to rely more on verbal guidance than actual stimulus to prevent markets from pricing in higher rates.

How do the world’s most prominent central banks stack up against each other? The Federal Reserve was extremely aggressive, more than tripling the size of its balance sheet from around $700-$800 billion pre-crisis to nearly 3 trillion today. Still, the ECB’s total asset holdings are actually larger than the Fed’s – it started from a higher base.

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The Bank of England, for its part, went even deeper into uncharted territory, with its assets as a percentage of GDP surpassing the Fed’s. By the same measure, the ECB has overtaken the Bank of Japan, which has been grappling with deflation for some two decades and started from a much higher level.

Pirate economics at the Fed

Avast ye swabs! Maybe the disconnect between improving labor markets and sluggish economic growth that  has Federal Reserve policymakers scratching their heads makes sense if viewed through a pirate’s spyglass – with a lot of latitude, according to a top Fed official.

St. Louis Fed President James Bullard sees the 8.3 unemployment rate continuing to fall at a sprightly pace. That’s even though Fed Chairman Ben Bernanke has fretted the jobless rate’s precipitous tumble since August, when it was 9. 1 percent, doesn’t square with the relatively modest pace of growth.

Bernanke has explained that according to a rule of thumb that has currency among economists, Okun’s Law, the jobless rate shouldn’t  fall much if growth doesn’t exceed the economy’s long-run average. So he and others at the Fed find it hard to be confident a growth rate of around 2 percent – the forecast for the first three months of the year – can do much to boost hiring.

Fed policy, University of San Diego style

A Fed economist for nearly two decades, San Francisco Fed President John Williams also taught for half a year at Stanford’s Business School in 2008, but on Tuesday, his students appeared to be only half listening.

When Williams took the podium a warm, sunny day at the University of San Diego’s School of Business Administration, he argued that the U.S. central bank must press on with its easy money policy to boost the economy. The recovery is growing too slowly to trim unemployment very quickly, he told the audience of perhaps 200 students and professors, and inflation is set to fall below the Fed’s 2 percent target. The Fed, he emphasized, is nowhere close to raising rates.

After taking a few questions from students,Williams left to chat with reporters and then to head to the airport for his flight back home. Then, with the help of economists from the San Francisco Fed, students held a mock Fed policy-setting panel.

Today in the euro zone

Top billing of the day probably goes to Germany’s Merkel and Italy’s Monti meeting in Rome, though it is quite late in the day.  The Italian premier remains the austerity poster boy, in contrast to Spain’s Rajoy who was partially let off the hook by Brussels last night for abandoning his deficit target, though he was told to split the difference between the first target and his new, looser goal.

While trying to avoid a blizzard of numbers, Spain was supposed to land a deficit of 6 percent of GDP last year and 4.4 this, en route to the main target of 3.0 percent in 2013. Rajoy’s new government announced that last year the deficit had in fact swelled to 8.5 percent of GDP and as such he would only aim for 5.8 percent this year while sticking to next year’s goal. The Eurogroup told him last night to aim for 5.3 this year, cutting some significant slack but, but by demanding more cuts than Rajoy wanted to deliver, probably avoiding serious market disquiet about Spain becoming the new Greece – forever missing its targets – and undermining the bloc’s new fiscal pact while the ink is barely dry.

Nonetheless, the net result is likely to be to drag Spain deeper into recession this year. Looking at bond yield spreads, the markets don’t smell blood yet.

A recovery in Europe? Really?

There’s a sense of relief among European policymakers that the worst of the euro zone’s crisis appears to have passed. Olli Rehn, the EU’s top economic officials, talked this week of a “turning of the tide in the coming months”. Mario Draghi, the president of the European Central Bank, speaks of “sizeable progress” and “a reassuring picture”.

At last week’s spring summit, EU leaders couldn’t say it enough: “This meeting is not a crisis meeting … it’s not crisis management,” according to Finnish Prime Minister Jyrki Katainen. All the talk is of how the euro zone’s economy will recover in the second half of this year.

But for the 330 million Europeans who make up the euro zone, the outlook has, if anything, darkened. As euro zone governments deepen their commitment to deficit-cutting, and rising oil prices mean higher-than-expected inflation, households can’t be counted on to drive growth. Not only did housing spending fall 0.4 percent in the October to December period from the third quarter, but unemployment rose to its highest since late 1997 in January.

Europe’s wobbly economy

Things are  looking a bit unsteady in the euro zone’s economy.  Just ask Olli Rehn, the EU’s top economic official, who warned this week of  “risky imbalances” in 12 of the European Union’s 27 members. And that’s doesn’t include Greece, which is too wobbly for words. 

Rehn is looking longer term, trying to prevent the next crisis. But the here-and-now is just as wobbly. The euro zone’s economy, which generates 16 percent of world output, shrunk at the end of 2011 and most economists expect the 17-nation currency area to wallow in recession this year and contract around 0.4 percent overall. Few would have been able to see it coming at the start of last year, when Europe’s factories were driving a recovery from the 2008-2009 Great Recession. And it shows just how poisonous the sovereign debt saga has become.

Not everyone thinks things are so shaky.  Unicredit’s chief euro zone economist, Marco Valli, is among the few who believe the euro zone will skirt a recession — defined by two consecutive quarters of contraction — in 2012. This year is “bound to witness a gradual but steady improvement in underlying growth momentum,” Valli said, saying the fourth quarter was the low point in the euro zone business cycle.

New ethics standards for economists

It seems sensible for most professions but in economics it’s nothing short of a revolution: The 17,000-strong American Economics Association has adopted a stringent new code for disclosures meant to prevent or at least highlight possible conflicts of interest.

The unexpected move is the result of pressure on the profession about dubious ethical practices and a pay-to-play culture, including  a Reuters story that dug into conflicts relating to testimony on financial reform – and found that about one in three who addressed Congress on the subject of Dodd-Frank failed to come clean on some type of relevant financial interest. The issue of conflicts among academic economists was first brought to light by the movie Inside Job, in which former Fed governor Frederic Mishkin is questioned sharply about having been paid over $100,000 to write a glowing review of Iceland’s financial system not long before it imploded.

Here is what the new AEA code will require academics to do:

1) Every submitted article should state the sources of financial support for the particular research it describes. If none, that fact should be stated.

Economics, astrology and 2012 predictions

As the usual end-of-year predictions roll in, perhaps the safest bet was captured this tweet from Bajaji Sridharan:

Since everyone is making predictions for 2012, here’s my prediction — 90%+ of all the 2012 predictions will be wrong.

It was another way of expressing a sentiment eloquently phrased by the late economist John Kenneth Galbraith – and frequently quoted by Dallas Fed President Richard Fisher – on the commonalities between economics and the stars. Galbraith wrote: