Texas Manufacturing Shows Steep Declines

The Dallas Federal Reserve Bank highlights the impact of continuing declines in oil prices in their latest monthly Texas Manufacturing Outlook Survey:

Texas factory activity fell sharply in January, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index—a key measure of state manufacturing conditions—dropped 23 points, from 12.7 to -10.2, suggesting output declined this month after growing throughout fourth quarter 2015.

Other indexes of current manufacturing activity also indicated contraction in January. The survey’s demand measures—the new orders index and the growth rate of orders index—led the falloff in production with negative readings last month, and these indexes pushed further negative in January. The new orders index edged down to -9.2, and the growth rate of orders index fell to -17.5, its lowest level in a year. The capacity utilization index fell 15 points from 8.1 to -7, and the shipments index also posted a double-digit decline into negative territory, coming in at -11.

Perceptions of broader business conditions weakened markedly in January. The general business activity and company outlook indexes fell to their lowest readings since April 2009, when Texas was in recession. The general business activity index fell 13 points to -34.6, and the company outlook index slipped to -19.5.

Here is a chart showing the Texas monthly manufacturing index.


The logical follow-on question is raised by James Hamilton – Can lower oil prices cause a recession?

Hamilton cites an NBER (National Bureau of Economic Research) paper – Geographic Dispersion of Economic Shocks: Evidence from the Fracking Revolution – which estimates jobs from fracking (hydraulic fracturing of oil deposits) resulted in more than 700,000 US jobs 2008-2009, resulting in an 0.5 percent decrease in the unemployment rate during that dire time.

Obviously, the whole thing works in reverse, too.

Eight states with a high concentration of energy-related jobs – including Texas and North Dakota – have experienced major impacts in terms of employment and tax revenues. See “Plunging oil prices: a boost for the U.S. economy, a jolt for Texas”.

Another question is how long can US-based producers hold out financially, as the price of crude continues to spiral down? See Half of U.S. Fracking Industry Could Go Bankrupt as Oil Prices Continue to Fall.

I’ve seen some talk that problems in the oil patch may play a role analogous to sub-prime mortgages during the last economic contraction.

In terms of geopolitics, there is evidence the Saudi’s, who dominate OPEC, triggered the price decline by refusing to limit production from their fields.

Is the Economy Moving Toward Recession?

Generally, a recession occurs when real, or inflation-adjusted Gross Domestic Product (GDP) shows negative growth for at least two consecutive quarters. But GDP estimates are available only at a lag, so it’s possible for a recession to be underway without confirmation from the national statistics.

Bottom line – go to the US Bureau of Economics Analysis website, click on the “National” tab, and you can get the latest official GDP estimates. Today, (January 25, 2016) this box announces “3rd Quarter 2015 GDP,” and we must wait until January 29th for “advance numbers” on the fourth quarter 2015 – numbers to be revised perhaps twice in two later monthly releases.

This means higher frequency data must be deployed for real-time information about GDP growth. And while there are many places with whole bunches of charts, what we really want is systematic analysis, or nowcasting.

A couple of initiatives at nowcasting US real GDP show that, as of December 2015, a recession is not underway, although the indications are growth is below trend and may be slowing.

This information comes from research departments of the US Federal Reserve Bank – the Chicago Fed National Activity Index (CFNAI) and the Federal Reserve Bank of Atlanta GDPNow model.


The Chicago Fed National Activity Index (CFNAI) for December 2015, released January 22nd, shows an improvement over November. The CFNAI moved –0.22 in December, up from –0.36 in November, and, in the big picture (see below) this number does not signal recession.


The index is a weighted average of 85 existing monthly indicators of national economic activity from four general categories – production and income; employment, unemployment, and hours; personal consumption and housing; and sales, orders, and inventories.

It’s built – with Big Data techniques, incidentally- to have an average value of zero and a standard deviation of one.

Since economic activity trends up over time, generally, the zero for the CFNAI actually indicates growth above trend, while a negative index indicates growth below trend.

Recession levels are lower than the December 2015 number – probably starting around -0.7.

GDPNow Model

The GDPNow Model is developed at the Federal Reserve bank of Atlanta.

On January 20, the GDPNow site announced,

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2015 is 0.7 percent on January 20, up from 0.6 percent on January 15. The forecasts for fourth quarter real consumer spending growth and real residential investment growth each increased slightly after this morning’s Consumer Price Index release from the U.S. Bureau of Labor Statistics and the report on new residential construction from the U.S. Census Bureau.

The chart accompanying this accouncement shows a somewhat less sanguine possibility – namely that consensus estimates and the output of the GDPNow model have been on a downward trend if you look at things back to September 2015.


Superforecasting – The Art and Science of Prediction

Philip Tetlock’s recent Superforecasting says, basically, some people do better at forecasting than others and, furthermore, networking higher performing forecasters, providing access to pooled data, can produce impressive results.

This is a change from Tetlock’s first study – Expert Political Judgment – which lasted about twenty years, concluding, famously, ‘the average expert was roughly as accurate as a dart-throwing chimpanzee.”

Tetlock’s recent research comes out of a tournament sponsored by the Intelligence Advanced Research Projects Activity (IARPA). This forecasting competition fits with the mission of IARPA, which is to improve assessments by the “intelligence community,” or IC. The IC is a generic label, according to Tetlock, for “the Central Intelligence Agency, the National Security Agency, the Defense Intelligence Agency, and thirteen other agencies.”

It is relevant that the IC is surmised (exact figures are classified) to have “a budget of more than $50 billion .. [and employ] one hundred thousand people.”

Thus, “Think how shocking it would be to the intelligence professionals who have spent their lives forecasting geopolical events – to be beaten by a few hundred ordinary people and some simple algorithms.”

Of course, Tetlock reports, this actually happened – “Thanks to IARPA, we now know a few hundred ordinary people and some simple math can not only compete with professionals supported by multibillion-dollar apparatus but also beat them.”

IARPA’s motivation, apparently, traces back to the “weapons of mass destruction (WMD)” uproar surrounding the Iraq war –

“After invading in 2003, the United States turned Iraq upside down looking for WMD’s but found nothing. It was one of the worst – arguable the worst – intelligence failure in modern history. The IC was humiliated. There were condemnations in the media, official investigations, and the familiar ritual of intelligence officials sitting in hearings ..”

So the IC needs improved methods, including utilizing “the wisdom of crowds” and practices of Tetlock’s “superforecaster” teams.

Unlike the famous M-competitions, the IARPA tournament collates subjective assessments of geopolitical risk, such as “will there be a fatal confrontation between vessels in the South China Sea” or “Will either the French or Swiss inquiries find elevated levels of polonium in the remains of Yasser Arafat’s body?”

Tetlock’s book is entertaining and thought-provoking, but many in business will page directly to the Appendix – Ten Commandments for Aspiring Superforecasters.

    1. Triage – focus on questions which are in the “Goldilocks” zone where effort pays off the most.
    2. Break seemingly intractable problems into tractable sub-problems. Tetlock really explicates this recommendation with his discussion of “Fermi-izing” questions such as “how many piano tuners there are in Chicago?.” The reference here, of course, is to Enrico Fermi, the nuclear physicist.
    3. Strike the right balance between inside and outside views. The outside view, as I understand it, is essentially “the big picture.” If you are trying to understand the likelihood of a terrorist attack, how many terrorist attacks have occurred in similar locations in the past ten years? Then, the inside view includes facts about this particular time and place that help adjust quantitative risk estimates.
    4. Strike the right balance between under- and overreacting to evidence. The problem with a precept like this is that turning it around makes it definitely false. Nobody would suggest “do not strike the right balance between under- and overreacting to evidence.” I guess keep the weight of evidence in mind.
    5. Look for clashing causal forces at work in each problem. This reminds me of one of my models of predicting real world developments – tracing out “threads” or causal pathways. When several “threads” or chains of events and developments converge, possibility can develop into likelihood. You have to be a “fox” (rather than a hedgehog) to do this effectively – being open to diverse perspectives on what drives people and how things happen.
    6. Strive to distinguish as many degrees of doubt as the problem permits but no more. Another precept that could be cast as a truism, but the reference is to an interesting discussion in the book about how the IC now brings quantitative probability estimates to the table, when developments – such as where Osama bin Laden lives – come under discussion.
    7. Strike the right balance between under- and overconfidence, between prudence and decisiveness. I really don’t see the particular value of this guideline, except to focus on whether you are being overconfident or indecisive. Give it some thought?
    8. Look for the errors behind your mistakes but beware of rearview-mirror hindsight biases. I had an intellectual mentor who served in the Marines and who was fond of saying, “we are always fighting the last war.” In this regard, I’m fond of the saying, “the only certain thing about the future is that there will be surprises.”
    9. Bring out the best in others and let others bring out the best in you. Tetlock’s following sentence is more to the point – “master the fine art of team management.”
  • Master the error-balancing cycle. Good to think about managing this, too.

Puckishly, Tetlocks adds an 11th Commandment – don’t treat commandments as commandments.

Great topic – forecasting subjective geopolitical developments in teams. Superforecasting touches on some fairly subtle points, illustrated with examples. I think it is well worth having on the bookshelf.

There are some corkers, too, like when Tetlock’s highlights the recommendations of 2nd Century physician to Roman emperors Galen, the medical authority for more than 1000 years.

Galen once wrote, apparently,

“All who drink of this treatment recover in a short time, except those whom it does not help, who all die…It is obvious, therefore, that it fails only in incurable cases.”