Friday, August 10, 2007

Wesbury, Kasriel, and P-Mac

P-Mac was kind enough to link to yesterday's post which pointed out the statistical sleight-of-hand utilized by Brian Wesbury.

Today, Paul Kasriel of Northern Trust weighs in. And he's not enamored of Wesbury's 'sunshine' either.

To argue that the economy is not in danger of slipping into a recession, as the lay public believes, because the consensus forecast of economists does not call for one is to ignore history. How many times has the consensus forecast of economists called for a recession? Although the lay public might have predicted eight out of the past four recessions, to paraphrase Samuelson, at least it has predicted some recessions. I am not aware of the consensus of economists’ forecasts ever predicting a recession. To Wesbury’s credit, he was one of only a handful of economists who predicted the last recession. (See, I’m fair and balanced.) The consensus did not.

Let me suggest another model that has a better track record in forecasting recessions than either the gaggle of professional economists, including Wesbury, or the lay public. It is the combination of the behavior of a yield spread and the CPI-adjusted monetary base. The yield-spread variable is the difference between the yield on the Treasury 10-year security and the federal funds rate. The monetary base consists of the reserves created by the Federal Reserve for the banking system and the currency held by the public. As the chart below shows, since 1970, whenever the four-quarter moving average of the yield spread has turned negative and, at the same time, the year-over-year change in the quarterly average of the CPI-adjusted monetary base has turned negative, a recession has occurred. Guess what? In each of the first two quarters of 2007, this combination of a negative yield spread and contracting real monetary base has obtained.

Less exotic, but portentious: housing and Mortgage-Equity-Withdrawal numbers........

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