Tag Archives: macroeconomic forecasts

Investment and Other Bank Macro Forecasts and Outlooks – 2

Today, I take a brief look at economic forecasts available from Morgan Stanley, Wells Fargo, and the French concern Credit Agricole. As readers will note, Morgan Stanley has a lively discussion of the implications of the US midterms, while Wells Fargo has a very comprehensive and easy-to-access series of economic projections, ranging from weekly, to monthly and annual. Credit Agricole (apologies for omitting the accent mark) is the first European bank profiled in these brief looks, and has quarterly updates of fairly comprehensive economic projections across a range of variables.

And I might mention that these publications, which date back into September in many cases, are interesting to review both because of their projections and because of what they miss – notably the drop in oil prices and aggressive new round of quantitative easing by the Bank of Japan.

The fact these developments are missed in these September and even later releases qualifies them as genuine surprises. Thus, their impacts are not discounted in past market developments, and, going forward, oil prices and Japan QE could exert significant, discrete effects on markets.

Morgan Stanley

According to the Federal Reserve’s National Information Center, Morgan Stanley is the nation’s 6th largest bank.


The Global Investment Committee (GOC) Weekly for November 10 is notable for some straight talk on the Implications of the US midterms, which Morgan Stanley see as slightly pro-growth, positive for equities, with constructive compromises, characteristic of lame duck presidencies. I quote fairly extensively, because the frankness of the insights and suggestions is refreshing.

The maxim that gridlock in Washington is good for markets has certainly held true during the “do nothing” Congress of the past two years. Now, with the Republicans winning control of the Senate and adding 15 seats to their House majority, the outlook appears to be for more of the same. Happily for investors, an analysis going back to 1900 shows that equity markets have averaged annualized 15% returns when the Congress is controlled by Republicans and the White House by a Democrat.

Although many pundits have suggested that the GOP sweep creates a mandate, the Global Investment Committee (GIC) sees the results as a mandate for change in the functioning and compromise in Washington rather than the embrace of a specific agenda. On that score, unlike the deeply partisan divide between the House and the Senate of the last four years that prevented any compromise bills from getting off the Hill, legislation may actually get to the president’s desk. While President Obama will be free to veto, he is now playing for his legacy and may be apt to compromise on some issues.

The Republicans’ challenge is to demonstrate leadership and competence in governing, a task that will require corralling the Tea Party caucus and, as Morgan Stanley & Co. Chief US Economist Vincent Reinhart wrote last week, “sequencing priorities” in a constructive way. Lacking a coherent issue-driven platform, most Republicans simply ran against Obama. Party infighting or an immediate battle about the debt ceiling and budget authorizations would likely be disastrous for the GOP—and the markets. From the GIC’s perspective, a better result would be for Congress to focus on job-creating initiatives and not on eviscerating the Affordable Care Act (ACA).

Agreement should be easiest around initiatives involving the energy sector, where this year’s 25% decline in oil prices has been front and center. American energy independence is no longer a dream but a real prospect with profound geopolitical as well as economic consequences (see Chart of the Week, page 3). Heretofore, the Keystone XL pipeline, a six-year-old proposal to connect Canadian oil with US Gulf Coast refineries, has been stalled amid wrangling with environmentalists. We believe the pipeline is now likely to win approval, creating a large national infrastructure project. Similarly, the growth of US energy supply is likely to reignite a debate on oil exports, which have been banned since the Arab oil embargoes of the 1970s. With US dollar strength likely to crimp other exports, expanding energy exports is a way to maintain economic growth. There is likely to be similar debate about exports of liquefied natural gas as the US is the world’s largest and lowest-cost producer. We believe that energy exports would be a major beneficiary focus if the new Congress approves the Trans-Pacific Partnership, a free trade agreement that would give the president authority to negotiate deals with 11 Asian nations.

Beyond energy, we expect repeal of the medical-device tax; expansion of defense spending, which has been curtailed under sequestration; and a debate on corporate tax reform, especially given the noise around tax-driven international mergers. Revisions to the ACA, to the extent they are pursued, will likely focus on measures that impact the number of insured and thus, hospitals and managed-care companies. The employer mandate, which requires employers with more than 100 workers to make available health insurance for any employee working more than 30 hours per week, is most likely to be revised, in our view.

As a final note, a review of state and local ballot initiatives suggest that voters are far from embracing an ideological position on fiscal austerity. Minimum-wage increases were passed in each state where they were on the ballot as did several large new-money infrastructure projects in New York and California—a development that MS & Co. Municipals Strategist, Michael Zezas, notes will likely increase bond supplies in 2015.

It looks like the august Global Economic Forum is being being published more infrequently than in the past, the last edition being March 5 of this year.

Wells Fargo

Wells Fargo, accounting to Wikipedia is –

an American multinational banking and financial services holding company which is headquartered in San Francisco, California, with “hubquarters” throughout the country… It is the fourth largest bank in the U.S. by assets and the largest bank by market capitalization…Wells Fargo is the second largest bank in deposits, home mortgage servicing, and debit cards. In 2011, Wells Fargo was the 23rd largest company in the United States.

The Wells Fargo website has a suite of forecasting reports, ranging from weekly, to monthly, to the big annual report, all downloadable in PDF format.

In October, the bank also released this video interview about their economic outlook.

In case you did not get time to watch that, one of the key graphics is the PCE deflator, which has been trending down recently, raising the spectre of deflation in the minds of some.


Credit Agricole

Credit Agricole is an international full services banking company, headquartered in France, with historical ties to French farming,

Their website offers at least two quarterly macroeconomic forecasting publications.

The publication Economic and Financial Forecasts presents a series of tabular forecasts for interest rates, exchange rates and commodity prices, together with the Crédit Agricole Group’s central economic projections. This is a kind of “just the numbers ma’am report.”

Macro Prospects is more discursive and with short highlights on key countries, such as, in the September issue, Brazil and China.

I signed up for emails from Credit Agricole, announcing updates of these documents.

Investment and Other Bank Macro Forecasts and Outlooks – 1

In yesterday’s post, I detailed the IMF World Economic Outlook revision for October 2014, recent OECD macroeconomic projections,  and latest from the Survey of Professional Forecasters.

All these are publically available, quite comprehensive forecasts, sort of standards in the field.

But there also are a range of private forecasts, and I want to focus on investment and other bank forecasts for the next few posts – touching on Goldman Sachs and JP Morgan today.

Goldman Sachs

Goldman Sachs – video presentations on global economic outlook with additional videos for the US, Europe, and major global regions. December 2013

Goldman Sachs, Economic Outlook for the United States, June 2014, Jan Hatzius

Goldman Sachs Asset Management, FISG Quarterly Outlook Q4 2014, (click on the right of the page for Full Document). This is the most up-to-date forecast/commentary I am able to find, and has a couple of relevant points.

One concerns the policy divergence at the central bank level. This is even more true now than when the report was released (probably in October), since the Bank of Japan is plunging into new, aggressive quantitative easing (QE), while the US Fed has ended its QE program, for the time being at least.

The other point concerns the European economy.

Among our economic forecasts, our negative outlook on the Eurozone represents the biggest departure from consensus. We believe policymakers will struggle to correct the trend of poor growth and disinflation. Optimism about the peripheries has faded, and the Eurozone’s powerhouse economy, Germany, has slowed amid weak global demand. Once again the Eurozone’s political divisions and fiscal constraints leave the ECB as the only authority able to respond unilaterally to the threat of a sharper downturn, though hopes of fiscal action are mounting.

Some signs of a sustainable Eurozone recovery have not held up to closer inspection. The peripheries have made substantial progress on austerity and structural reforms, but efforts appear to have stalled, and Spain has probably reaped the most it can from its adjustment for now. Italy’s policy paralysis and relapse into recession is disappointing given this year’s changing of the political guard, which saw Silvio Berlusconi’s exit and Prime Minister Matteo Renzi’s election on a heavily reformist platform. Renzi has shifted gears from political reform to labor reform, which could get under way in early 2015. But Italy’s high debt stock makes it particularly vulnerable to a market backlash, and we are watching for signs of investor pullback that could drive sovereign yields higher.

JP Morgan

JP Morgan has a 2014 Economic Outlook in a special issue of their Thought magazine. This is definitely dated, but there is a weekly Economic Update in a kind of scorecard format (up/down/nochange) from their Asset Management Group.

I’ve got to say, however, that one of the most exciting publications along these lines is their quarterly Guide to the Markets from JP Morgan Asset Management. Here are highlights from an interactive version of the 4Q Guide.

First, the scope of coverage is impressive, although, note this is more of an update of conditions, than a forecast. The reader supplies the forecasts, however, from these engaging slides.


But this slide does not need to produce a forecast to make its point – which is maybe we are not in a stock market bubble but at the start of a long upward climb in the market. Optimism forever!

StockMarketSince 1900

There are plenty of slides that have moral to the story, such as this one on education and employment.


Then, this graphic on China is extremely revealing, and suggests a forward perspective.


I’m finding this excursion into bank forecasts productive and plan coming posts along these lines. I’d rather use the blog as a scratch-pad to share insights as I go along, than produce one humungous summary. So stay tuned.

Top photo courtesy of the University of Richmond

Global and US Economic Outlook – November 2014

There are a number of free, publically available macroeconomic forecast resources which have standing and a long track record.

Also, investment and other banks make partial releases of their macro projections.

IMF World Economic Outlook

The International Monetary Fund (IMF) revises its World Economic Outlook (WEO) toward the end of each year, this year in October with Legacies, Clouds, Uncertainties.

One advantage is comprehensive coverage. So there are WEO projections over 1, 2 and 3 year horizons for more than 100 countries, even obscure island principalities, and for dozens of variables, including GDP variously measured, inflation, imports and exports, unemployment rate, and population.

Here are highlights of the October revision (click to enlarge).


Largely due to weaker-than-expected global activity in the first half of 2014, the growth forecast for the world economy has been revised downward to 3.3 percent for this year, 0.4 percentage point lower than in the April 2014 World Economic Outlook (WEO). The global growth projection for 2015 was lowered to 3.8 percent.

The global recovery continues to be uneven, with some countries and areas struggling, while others move forward into growth.

Downside risks are increasing and include –

SHORT TERM: worsening geopolitical tensions (Ukraine, Syria) and reversal of recent risk spread and volatility compression in financial markets

MEDIUM TERM: stagnation and low potential growth in advanced economies (Eurozone flirting with deflation) and a decline in potential growth in emerging markets

Organization of Economic Cooperation and Development (OECD) Projections

The OECD Economic Outlook Advance Release for the G-20 from October 2014 projects the following growth rates for 2014 and 2015 (click to enlarge).


For total global GDP growth, the OECD projects 3.3 percent for 2014 and 3.7 percent for 2015 or 0.1 percent less for 2015 than the IMF.

Chinese economic growth is ratcheting down from double-digit levels several years ago, to around 7 percent, while Indian GDP growth is projected to stay in the 6 percent range.

There are significant differences in the IMF and OECD forecasts for the United States.

Survey of Professional Forecasters

The Survey of Professional Forecasters (SPF) is another publically available set of macroeconomic forecasts, but focusing on the US economy. The SPF is maintained by the Philadelphia Federal Reserve Bank, which polls participating analysts quarterly, compiling consensus results, spreads, and distributions.

The latest SPF Survey was released August 2014, and is somewhat more optimistic about US economic growth than the IMF and OECD projections.


Investment Bank Data and Projections

Wells Fargo Securities Economics Group produces a monthly report with detailed quarterly forecasts for the US economy. Here is a sample from August 2014 (click to enlarge).


I’m compiling a list of these products and their availability.

The bottom line is there are plenty of forecasts to average together to gin up high likelihood numbers to plug into sales and other business forecast models.

At the same time, there is a problem with calling turning points in almost all these products.

This is not a problem on YouTube now, though. If you search “economic forecasts 2015” on YouTube today, you will see a lengthly list of predictions of economic collapse and market catastrophe by the likes of Jim Rogers, Gerald Calente, and others who dabble in this genre.

We need something like the canary in the coal mine.

Mapping High Frequency Data Onto Aggregated Variables – Monthly and Quarterly Data

A lot of important economic data only are available in quarterly installments. The US Gross Domestic Product (GDP) is one example.

Other financial series and indexes, such as the Chicago Fed National Activity Index, are available in monthly, or even higher frequencies.

Aggregation is a common tactic in this situation. So monthly data is aggregated to quarterly data, and then mapped against quarterly GDP.

But there are alternatives.

One is what Elena Andreou, Eric Ghysels and Andros Kourtellos call a naïve specification –


With daily (D) and quarterly (Q) data, there typically are a proliferation of parameters to estimate – 66 if you allow 22 trading days per month. Here ND in the above equation is the number of days in the quarterly period.

The usual workaround is a weighting scheme. Thus, two parameter exponential Almon lag polynomials are identified with MIDAS, or Mixed Data Sampling.

However, other researchers note that with the monthly and quarterly data, direct estimation of expressions such as the one above (with XM instead of XD ) is more feasible.

The example presented here shows that such models can achieve dramatic gains in accuracy.

Quarterly and Monthly Data Example

Let’s consider forecasting releases of the US nominal Gross Domestic Product by the Bureau of Economic Analysis.

From the BEA’s 2014 News Release Schedule for the National Economic Accounts, one can see that advance estimates of GDP occur a minimum of one month after the end of the quarter being reported. So, for example, the advance estimate for the Third Quarter was released October 30 of this year.

This means the earliest quarter updates on US GDP become available fully a month after the end of the quarter in question.

The Chicago Fed National Activity Index (CFNAI), a monthly guage of overall economic activity, is released three weeks after the month being measured.

So, by the time the preliminary GDP for the latest quarter (analyzed or measured) is released, as many as four CFNAI recent monthly indexes are available, three of which pertain to the months constituting this latest measured quarter.

Accordingly, I set up an equation with a lagged term for GDP growth and fifteen terms or values for CFNAImonthly indexes. For each case, I regress a value for GDP growth for quarter t onto GDP growth for quarter t-1 and values for all the monthly CFNAI indices for quarter t, except for the most recent or last month, and twelve other values for the CFNAI index for the three quarters preceding the final quarter to be estimated – quarter t-1, quarter t-2, and quarter t-3.

One of the keys to this data structure is that the monthly CFNAI values do not “stack,” as it were. Instead the most recent lagged CFNAI value for a case always jumps by three months. So, for the 3rd quarter GDP in, say, 2006, the CFNAI value starts with the value for August 2006 and tracks back 14 values to July 2005. Then for the 4th quarter of 2006, the CFNAI values start with November 2006, and so forth.

This somewhat intricate description supports the idea that we are estimating current quarter GDP just at the end of the current quarter before the preliminary measurements are released.

Data and Estimation

I compile BEA quarterly data for nominal US GDP dating from the first Quarter of 1981 or 1981:1 to the 4th Quarter of 2011. I also download monthly data from the Chicago Fed National Activity Index from October 1979 to December 2011.

For my dependent or target variable, I calculate year-over-year GDP growth rates by quarter, from the BEA data.

I estimate an equation, as illustrated initially in this post, by ordinary least squares (OLS). For quarters, I use the sample period 1981:2 to 2006:4. The monthly data start earlier to assure enough lagged terms for the CFNAI index, and run from 1979:10 to 2006:12.


The results are fairly impressive. The regression equation estimated over quarterly and monthly data to the end of 2006 performs much better than a simple first order autocorrelation during the tremendous dip in growth characterizing the Great Recession. In general, even after stabilization of GDP growth in 2010 and 2011, the high frequency data regression produces better out-of-sample forecasts.

Here is a graph comparing the out-of-sample forecast accuracy of the high frequency regression and a simple first order autocorrelation relationship.


What’s especially interesting is that the high frequency data regression does a good job of capturing the drop in GDP and the movement at the turning point in 2009 – the depth of the Great Recession.

I throw this chart up as a proof-of-concept. More detailed methods, using a specially-constructed Chicago Fed index, are described in a paper in the Journal of Economic Perspectives.

More on Negative Nominal Interest Rates

The European Central Bank (ECB) experiment with negative interest rates has not occurred in a vacuum. The concept has been discussed with special urgency since 2008 in academic and financial circles.

Recently, Larry Summers and Paul Krugman have developed perspectives on the desirability of busting through the zero bound on interest rates to help balance aggregate demand and supply at something like full employment.

Then, there is Ken Rogoff’s Costs and Benefits to Phasing Out Paper Currency, distributed by the National Bureau of Economic Research (NBER).

Rogoff notes,

If all central bank liabilities were electronic, paying a negative interest on reserves (basically charging a fee) would be trivial. But as long as central banks stand ready to convert electronic deposits to zero-interest paper currency in unlimited amounts, it suddenly becomes very hard to push interest rates below levels of, say, -0.25 to -0.50 percent, certainly not on a sustained basis. Hoarding cash may be inconvenient and risky, but if rates become too negative, it becomes worth it.

Rogoff cites Buiter’s research at the London School of Economics (LSE) which dates to a decade earler, but has been significantly revised in the 2009-10 timeframe.

For example, there is Negative Nominal Interest Rates: Three ways to overcome the zero lower bound, which sports the following abstract:

The paper considers three methods for eliminating the zero lower bound on nominal interest rates and thus for restoring symmetry to domain over which the central bank can vary its policy rate. They are: (1) abolishing currency (which would also be a useful crime-fighting measure); (2) paying negative interest on currency by taxing currency; and (3) decoupling the numéraire from the currency/medium of exchange/means of payment and introducing an exchange rate between the numéraire and the currency which can be set to achieve a forward discount (expected depreciation) of the currency vis-a-vis the numéraire when the nominal interest rate in terms of the numéraire is set at a negative level for monetary policy purposes.

Buiter notes the “scrip” money developed locally during the Great Depression (also see Champ) effectively involved a tax on holding this type of currency.

Stamp scrip, sometimes called coupon scrip, arose in several communities. It was denominated in dollars, in denominations from 25 cents to $5, with $1 denominations most common. Stamp scrip often became redeemable by the issuer in official U.S. dollars after one year.

What made stamp scrip unique among scrip schemes was a series of boxes on the reverse side of the note. Stamp scrip took two basic forms—dated and undated (often called “transaction stamp scrip”). Typically, 52 boxes appeared on the back of dated stamp scrip, one for each week of the year. In order to spend the dated scrip, the stamps on the back had to be current. Each week, a two-cent stamp needed to be purchased from the issuer and affixed over the corresponding week’s box on the back of the scrip. Over the coming week, the scrip could be spent freely within the community. Whoever was caught holding the scrip at week’s end was required to attach a new stamp before spending the scrip. In this scheme, money became a hot potato, with individuals passing it quickly to avoid having to pay for the next stamp.

Among the virtues of eliminating paper currency and going entirely to electronic transactions, thus, would be that the central bank could charge a negative interest rate.

Additionally, by eliminating the anonymity of paper money and coin, criminal activities could be more effectively controlled. Rogoff offers calculations suggesting the percentages of US currency held in Europe in ratio to overall economic activity are suspicious, especially since there are apparently a surfeit of 100 dollar bills in these foreign holdings.

These ideas go considerably beyond the small negative interest charged by the ECB on banks holding excess reserves in the central bank accounts. What is being discussed is an extension of negative nominal interest, or a tax on holding cash, to all business agents and individuals in an economy.

Negative Nominal Interest Rates – the European Central Bank Experiment

Larry Summers, former US Treasury Secretary and, earlier, President of Harvard delivered a curious speech at an IMF Economic Forum last year. After nice words about Stanley Fischer, currently Vice Chair of the Fed, Summers entertains the notion of negative interest rates to combat secular stagnation and restore balance between aggregate demand and supply at something like full employment.

Fast forward to June 2014, when the European Central Bank (ECB) pushes the interest rate on deposits European banks hold in the ECB into negative territory. And on September 4, the ECB drops the deposit rates further to -0.2 percent, also reducing a refinancing rate to virtually zero.


The ECB discusses this on its website – Why Has the ECB Introduced a Negative interest Rate. After highlighting the ECB mandate to ensure price stability by aiming for an inflation rate of below but close to 2% over the medium term, the website observes euro area inflation is expected to remain considerably below 2% for a prolonged period.

This provides a rationale for lower interest rates, of which there are principally three under ECB control – a marginal lending facility for overnight lending to banks, the main refinancing operations and the deposit facility.

Note that the main refinancing rate is the rate at which banks can regularly borrow from the ECB while the deposit rate is the rate banks receive for funds parked at the central bank.

The ECB is adjusting interest rates under their control across the board, as suggested by the chart, but worries that to maintain a functioning money market in which commercial banks lend to each other, these rates cannot be too close to each other.

So, bottom line, the deposit rate was lowered to − 0.10 % in June to maintain this corridor, and then further as the refinancing rate was dropped to -.05 percent.

The hope is that lower refinancing rates will mean lower rates for customers for bank loans, while negative deposit rates will act as a disincentive for banks to simply park excess reserves in the ECB.

Nominal Versus Real Interest Rates and Bond Yields

If you want to prep for, say, negative yields on two year Irish bonds, or issuance of various European bonds with negative yield, as well as the negative yields of a variety of US securities in recent years, after inflation, check out How Low Can You Go? Negative Interest Rates and Investors’ Flight to Safety.

An asset can generate a negative yield, on a conventional, rather than catastrophic basis, in a nominal or real, which is to say, inflation-adjusted, sense.

Some examples of negative real interest rates of yields –

The yield to maturity on the 5-year Treasury note has been below 2 percent since July 2010, and the yield to maturity on the 10-year Treasury note has been below 2 percent since May 2012. Yet, looking forward, the Federal Open Market Committee in January 2012 announced an inflation target of 2 percent—implying an anticipated negative real yield over the life of the securities. Investors, facing uncertainty, appear willing to pay the U.S. government—when measured in real, ex post inflation-adjusted dollars—for the privilege of owning Treasury securities.

And the current government bond yield situation, from Bloomberg, shows important instances of negative yields, notably Germany and Japan – two of the largest global economies. Click to enlarge.


Where the ECB Goes From Here

Mario Draghi, ECB head, gave a speech clearly stating monetary policy is not enough, at the recent Jackson Hole conference of central bankers. After this, the financial press was abuzz with the idea Draghi is moving toward the Japanese leader Abe’s formulation in which there are three weapons or arrows in the Japanese formulation– monetary policy, fiscal policy and structural reforms.

The problem, in the case of the Eurozone, is achieving political consensus for fiscal policies such as backing bonds for badly needed infrastructure development. German opposition seems to be sustained and powerful.

Because of the “political economy” factors , currency and banking problems in the Eurozone are probably more complicated and puzzling than many business executives and managers, looking for a take on the situation, would prefer.

A Thought Experiment

Before diving into this conceptually hazardous topic, though, I’d like to pose a puzzle for readers.

Can banks realistically “charge” negative interest rates to commercial customers?

I seem to have cooked up a spreadsheet where such loans could pay a rate of positive real return to banks, if the rate of deflation can be projected.  In one variant, the bank collects a lending fee at the outset and then the interest rate for installments is negative.

The “save” for banks is that future deflation could inflate the real value of declining nominal installment payments, creating a present value of this stream of payments which is greater than the simple sum of such payments.

I’m not ready for primetime television with this, but it seems such a world encapsulates a very dour view of the future – one that may not be too far from the actual situation in Europe and Japan.

Money black hole at top from Conservative Read

Something is Happening in Europe

Something is going on in Europe.

Take a look at this chart of the euro/dollar exchange rate, and how some event triggered a step down mid week of last week (from xe.com).


The event in question was a press conference by Mario Draghi (See the Wall Street Journal real time blog on this event at Mario Draghi Delivers Fresh ECB Plan — Recap).

The European Central Bank under Draghi is moving into exotic territory – trying negative interest rates on bank deposits and toying with variants of Quantitative Easing (QE) involving ABS – asset backed securities.

All because the basic numbers for major European economies, including notably Germany and France (as well as long-time problem countries such as Spain), are not good. Growth has stalled or is reversing, bank lending is falling, and deflation stalks the European markets.

Europe – which, of course, is sectored into the countries inside and outside the currency union, countries in the common market, and countries in none of the above – accounts for several hundred million persons and maybe 20-30 percent of global production.

So what happens there is significant.

Then there is the Ukraine crisis.

Zerohedge ran this graphic recently showing the dependence of European countries on gas from Russia.


The US-led program of imposing sanctions on Russia – key individuals, companies, banks perhaps – flies in the face of the physical dependence of Germany, for example, on Russian gas.

On the other hand, there is lots of history here on all sides, including, notably, the countries formerly in the USSR in eastern Europe, who no doubt fear the increasingly nationalistic or militant stance shown by Russia currently in, for example, re-acquiring Crimea.

As Chancellor Merkel has stressed, this is an area for diplomacy and negotiation – although there are other voices and forces ready to rush more weapons and even troops to the region of conflict.

Finally, as I have been stressing from time to time, there is an emerging demographic reality which many European nations have to confront.

Edward Hugh has several salient posts on possibly overlooked impacts of aging on the various macroeconomies involved.

There also is the vote on Scotland coming up in the United Kingdom (what we may, if the “yes” votes carry, need to start calling “the British Isles.”)

I’d like to keep current with the signals coming from Europe in a few blogs upcoming – to see, for example, whether swing events in the next six months to a year could originate there.

US Surge in 2nd Quarter GDP

Statistica put together this graphic showing quarter-over-quarter growth in US real GDP from 2009 to the 2nd quarter of 2014.


The last bar in the chart, showing 4.2 percent growth, is the 2nd quarter 2014 estimate, released by The Bureau of Economic Analysis (BEA) August 28. This represents a slight upward revision from the 4.0 percent “advance estimate” released in July.

Notice these are quarter-over-quarter growth rates, and, as the Statistica chart shows, are fairly volatile.

Thus, a 4.1 percent real or inflation-adjusted growth rate for the April through June 2014 period does not mean 2014 growth will roll in at this rate.

In fact, as the Forbes item on this release highlights,

Dan North, chief economist at Euler Hermes North America… warns GDP watchers should not get too excited…since the economy contracted 2.1% in the first quarter of this year the large jump is payback and in the first half of 2014 the economy gained just 1%. North expects third and fourth quarter GDP to gain around 3% which would round out to an uninspiring roughly 2% growth for the year.

The BEA presents the following detail on the growth estimate (click to enlarge).


Personal consumption expenditures are the largest component in the real GDP series, and bounced back to 2.5 percent growth in the 2nd quarter. Gross private domestic investment surged 17.5 percent for Q2 over Q1, and included healthy 10.7 Q-over-Q growth in investment in equipment. Exports also showed solid Q-over-Q growth.

Europe and Japan

Europe and Japan numbers for the 2nd Quarter are more pessimistic.

Here’s a comparison with European Q-over-Q real growth rates from Eurostat .


The EA 18 is the Euro Area, which includes Belgium, Germany, Estonia, Ireland, Greece, Spain, France, Italy, Cyprus, Latvia, Luxembourg, Malta, the Netherlands, Austria, Portugal, Slovenia, Slovakia and Finland.

Germany and Italy report -0.2 percent declines Q-over-Q growth in the 2nd quarter.

Trading Economics compiles the following chart of Japanese Q-over-Q real GDP growth, which tanked the 2nd quarter.


From this data, I think it is safe to say the recovery from 2008-2009 is still under-performing.

Whether these data will be followed on by year-over-year declines in future quarters remains to be seen.

Recession and Economic Projections

I’ve been studying the April 2014 World Economic Outlook (WEO) of the International Monetary Fund (IMF) with an eye to its longer term projections of GDP.

Downloading the WEO database and summing the historic and projected GDP’s suggests this chart.


The WEO forecasts go to 2019, almost to our first benchmark date of 2020. Global production is projected to increase from around $76.7 trillion in current US dollar equivalents to just above $100 trillion. An update in July marked the estimated 2014 GDP growth down from 3.7 to 3.4 percent, leaving the 2015 growth estimate at a robust 4 percent.

The WEO database is interesting, because it’s country detail allows development of charts, such as this.


So, based on this country detail on GDP and projections thereof, the BRIC’s (Brazil, Russia, India, and China) will surpass US output, measured in current dollar equivalents, in a couple of years.

In purchasing power parity (PPP) terms, China is currently or will soon pass the US GDP, incidentally. Thus, according to the Big Mac index, a hamburger is 41 percent undervalued in China, compared to the US. So boosting Chinese production 41 percent puts its value greater than US output. However, the global totals would change if you take this approach, and it’s not clear the Chinese proportion would outrank the US yet.

The Impacts of Recession

The method of caging together GDP forecasts to the year 2030, the second benchmark we want to consider in this series of posts, might be based on some type of average GDP growth rate.

However, there is a fundamental issue with this, one I think which may play significantly into the actual numbers we will see in coming years.

Notice, for example, the major “wobble” in the global GDP curve historically around 2008-2009. The Great Recession, in fact, was globally synchronized, although it only caused a slight inflection in Chinese and BRIC growth. Europe and Japan, however, took a major hit, bringing global totals down for those years.

Looking at 2015-2020 and, certainly, 2015-2030, it would be nothing short of miraculous if there were not another globally synchronized recession. Currently, for example, as noted in an earlier post here, the Eurozone, including Germany, moved into zero to negative growth last quarter, and there has been a huge drop in Japanese production. Also, Chinese economic growth is ratcheting down from it atmospheric levels of recent years, facing a massive real estate bubble and debt overhang.

But how to include a potential future recession in economic projections?

One guide might be to look at how past projections have related to these types of events. Here, for example, is a comparison of the 2008 and 2014 US GDP projections in the WEO’s.


So, according to the IMF, the Great Recession resulted in a continuing loss of US production through until the present.

This corresponds with the concept that, indeed, the GDP time series is, to a large extent, a random walk with drift, as Nelson and Plosser suggested decades ago (triggering a huge controversy over unit roots).

And this chart highlights a meaning for potential GDP. Thus, the capability to produce things did not somehow mysteriously vanish in 2008-2009. Rather, there was no point in throwing up new housing developments in a market that was already massively saturated, Not only that, but the financial sector was unable to perform its usual duties because it was insolvent – holding billions of dollars of apparently worthless collateralized mortgage securities and other financial innovations.

There is a view, however, that over a long period of time some type of mean reversion crops up.

This is exemplified in the 2014 Congressional Budget Office (CBO) projections, as shown in this chart from the underlying detail.


This convergence on potential GDP, which somehow is shown in the diagram with a weaker growth rate just after 2008, is based on the following forecasts of underlying drivers, incidentally.


So again, despite the choppy historical detail for US real GDP growth in the chart on the upper left, the forecast adopted by the CBO blithely assumes no recession through 2024 as well as increase in US interest rates back to historic levels by 2019.

I think this clearly suggests the Congressional Budget Office is somewhere in la-la land.

But the underlying question still remains.

How would one incorporate the impacts of an event – a recession – which is probably almost a certainty by the end of these forecast horizons, but whose timing is uncertain?

Of course, there are always scenarios, and I think, particularly for budget discussions, it would be good to display one or two of these.

I’m interested in reader suggestions on this.

Links – Labor Day Weekend


Amazon’s Cloud Is So Pervasive, Even Apple Uses It

Your iCloud storage is apparently on Amazon.

Amazon’s Cloud Is The Fastest Growing Software Business In History


AWS is Amazon Web Services. The author discounts Google growth, since it is primarily a result of selling advertising. 

How Microsoft and Apple’s Ads Define Their Strategy

Microsoft approaches the market from the top down, while Apple goes after the market from the bottom up.

Mathematical Predictions for the iPhone 6

Can you predict features of the iPhone6 scheduled to be released September 6?


Predictive Analytics

Comparison of statistical software

Good links for R, Matlab, SAS, Stata, and SPSS.

Types and Uses of Predictive Analytics, What they are and Where You Can Put Them to Work

Gartner says that predictive analytics is a mature technology yet only one company in eight is currently utilizing this ability to predict the future of sales, finance, production, and virtually every other area of the enterprise. What is the promise of predictive analytics and what exactly are they [types and uses of predictive analytics]? Good highlighting of main uses of predictive analytics in companies.

The Four Traps of Predictive Analytics

Magical thinking/ Starting at the Top/ Building Cottages, not Factories/ Seeking Purified Data. Good discussion. This short article in the Sloan Management Review is spot on, in my opinion. The way to develop good predictive analytics is to pick an area, indeed, pick the “low-handing fruit.” Develop workable applications, use them, improve them, broaden the scope. The “throw everything including the kitchen sink” approach of some early Big Data deployments is almost bound to fail. Flashy, trendy, but, in the final analysis, using “exhaust data” to come up with obscure customer metrics probably will not cut in the longer run.

Economic Issues

The Secular Stagnation Controversy

– discusses the e-book Secular Stagnation: Facts, Causes and Cures. The blogger Timothy Taylor points out that “secular” here has no relationship to lacking a religious context, but refers to the idea that market economies, or, if you like, capitalist economies, can experience long periods (decade or more) of desultory economic growth. Check the e-book for Larry Summer’s latest take on the secular stagnation hypothesis.

Here’s how much aid the US wants to send foreign countries in 2015, and why (INFOGRAPHIC