Bernanke's Economic Outlook

So on Tuesday Bernanke spoke to some banker's association in Atlanta and covered some important topics: like, is the humidity there not craaaazy?

 

Okay, not really. He re-iterated the same stuff he always does. That they'd rather pick from their tool belt of regulatory options to affect the economy rather than doing interest rate changes. Why? Does he not crave absolute power? Well the real answer is the interest rate is already so low, it's no longer a tool that the federal reserve really has available to them. But if they admit to this maybe consumer confidence will implode...or something. Not to mention continuing to keep interest rates incredibly low is really working out for the banker elite who's making a killing on borrowing money from the government at 0% and then lending it back to the government via treasury bonds for 3 or 4%.

 

He mentions trying to keep inflation low, though it's clear from low rates for so long that this is not a priority for the voting majority of the federal reserve board. Instead it's more cheap talk to buoy up certain people (large debtors like banks who have a bunch of mortgages or the government itself) rather than worry about those who are at a critical point (the poor and the elderly living on fixed incomes).

 

He states that his objective is to keep inflation low and keep the value of the dollar high and his excuse for why this is not actually happening is the importation of oil. Gas prices, something the reserve doesn't even look at in its core inflation index, are wildly inflating and somehow contributing to a falling dollar value. The US actually only imports about 51% of its oil. Something like 350 billion a year. With a 14 trillion GDP, 1 trillion handed to banks as free money, and a looming national debt, Bernanke really wants to blame this one on gas prices? If anything the falling price of the dollar might be contributing to speculation on oil as a commodity which could be one of the main reasons for the rising price of gas at the pump.

 

His only concessions to the real people is that they are working on achieving "maximum employment" (almost as if he is admitting to a possible future of long term high unemployment rates). I guess he is working on that like I am working on being nicer to rich, elite bankers. Which is to say, not at all. Then he only briefly mentions that the lower growth rate the GDP is seeing is somehow contributing to what people really care about (employment, real wages) because it is "frustratingly slow". I'm not sure why he'd connect GDP with employment. That's like connecting stock market prices, dividends, and shareholder profits with real wage gains for the working class. The two are not correlated. Or if anything, are negatively correlated.

Inflation and Retirement

There's an article in the NY times Economix blog warning us not to get too over excited about inflation. That at 1.3% it's historically low. Though one could argue the things that inflation does not consider are what's actually important for the people that it most directly affects. Much like federal poverty levels tend to be focused around food as that used to be the most expensive monthly cost to families whereas now housing takes up a huge chunk.

 

As I was reading the article and thinking about the loose connections to the great depression I wondered whether the poor unemployment numbers were causing fewer people to retire. We've been warned for years about the impending mass retirement of the baby boomers and how that will give us a huge technically educated labor shortage. I've talked about that myth before.

 

As you can see by the chart above, those 55 and older have been hit hard (as hard magnitude-wise as any other age group) by unemployment. BLS doesn't specifically track retirement, but it does track those "not in the labor force" and "not looking for a job". This was roughly 60% of the over 55 population in 2006 and 59.5% of the over 55 population in 2008. Averaged between 2006 and 2008, the over 55 population grew about 2.7% a year. So you might expect to see similar growth in how many are not in the labor force by choice. Instead from 2006 to 2010 the growth of this possible "retired" population increased 1.4%, 1.88%, 1.06%, 1.42% and 2.20% respectively.

 

It could be the peak in 2007 was due to the brutality of the recession beginning and a lot of people choosing to drop out voluntarily. Maybe the high number in 2010 can be attributed to people who had wanted to retire sooner but couldn't now being able to once the stock market gains started improving. At any rate, this possible "retired" population is increasing much more slowly than the actual population itself. The question is, as the economy starts to even out, will we see more "older" people trying to return to work or will we see more of these people finally being able to retire? If the stock market finally allows them to drop out of the labor force, will inflation let them have any real security by then?

Cost of a college education

What's it cost to get a college degree these days and is it worth it? The economix blog at the NY Times talks about the rising cost of student debt. Graduates who took out loans left college with an average of $24,000. That might not sound as high as the scare tactic numbers you've been reading everywhere, but of course the concern is that not every college student finishes their degree. So while the total lifetime earnings of a college grad are better than those of just a high school graduate, they aren't always achieving higher starting salaries when they need them to start paying off expensive student loan payments.
Cost of college does seem to be more about choices though than the media makes it out to be, Bankrate has this list of the 10 top most expensive and cheapest private and public colleges. Sarah Lawrence tops out at 30k+ a year (not including room and board I'm guessing) but even the most expensive public colleges range from 8-10k. That's probably in-state tuition, and probably not including room and board, and there's always the top 10 affordable public colleges in the range of 2.6-3.2k a year. Not too bad, and several of them are not bad.

Has college tuition and student loan debt gotten out of control? Or are too many people making poor choices and not attending local and affordable state colleges? Or is that not even an issue when expensive colleges and student loan companies are fleecing parents and students?

Economic Trifecta

There's good news and there's good news. But is any of this anything other than corporate bull or unrestrained economic optimism?

 

According to The Detroit News, the auto industry faces an engineer shortage. Of course if you read the article there's no real data to back this up other than this tidbit:

The nation's auto sector added 32,000 jobs during the past year, and thousands have been among engineers.

General Motors Co. and Chrysler Group LLC announced last fall that they were hiring 1,000 engineers — though some are contractors. Ford Motor Co. is hiring 750 salaried workers in product development this year; many are engineers.

No real numbers on how many of the new hires are auto engineers. Or how that is supposed to backfill all the positions they laid off. Also the assessment that "the future is brighter" is pretty weak compared to their overly optimistic title.

CNNMoney has decided similarly to be optimistic reporting jobs recovery is fo' realz, yo. Yes hiring picked up last month. Not sure where there's any data to show it's sustained. I'd sure like it to be, but I'm also not afraid to be all Debbie Downer on this sunshine and rainbow fest if I need to.

And lastly, CNNMoney is all like engineering is the best paying college major. Fantastic.

Chemical engineers were offered the highest starting salaries this year -- an average of $66,886. Mechanical engineers received salary offers averaging $60,739, and electrical and communications engineering majors saw average offers of $60,646. Computer engineering was the fifth highest-paying major, with offers averaging $60,112.

Rounding out the top ten best-paying majors were industrial engineering, systems engineering, engineering technology, information sciences and systems, and business systems networking or telecommunications.

What, really? Where are these jobs?! I'm pretty shocked EE isn't much higher on this list, or CE as many of those people end up working in software. Which is where I've seen all the jobs lately. I guess this is the average pay if you were lucky enough to actually get a job. If you were part of the 10% unemployed who can't get a job, sorry. Or if you're part of the unknown percentage of engineering graduates who gave up and went into some other field just so you could earn a freaking paycheck not sure what your average salary is there. I'd definitely recommend engineering over art history, but I'm not sure we can celebrate about who has the "highest salary" when it's all moot as no one's hiring anyone anyways.

Insidious Inflation

It's another week of data mining for me. Trying to compare two equivalent pieces of hardware for what could be a very pricey subcontracting decision. It doesn't help the powers that be would like to limit the testing done (which of course limits the data) so that they look good to the people above them.

One place where there's plenty of data is the US Government websites. There's been some talk recently about the affects of TARP and the stimulus and the Fed buying up treasury bonds and pumping money into the economy and how that will affect inflation. There's been plenty of arguments that despite all this they haven't seen inflation really go up, and that's the Fed's major justification for not upping interest rates at this point. If you look at historic CPI you can see it's been pretty flat throughout this recession.

But of course the CPI doesn't include fuel or food or things most lower and middle class Americans purchase on a regular basis. Am I that concerned if the cost of my clothes or laptops is going up when food and petrol are my primary concerns? From my own personal data mining I've amassed a whopping three months of information on gas prices and you can see it's got a very obvious upward trend. The especially troubling part of that is that typical year end gas prices tend to drop and that starting the year on a high note for oil companies probably does not bode well for the rest of us.

Whether gas is really an early indicator could be argued. And the folks that are not inflation hawks will definitely argue to the contrary. Afterall, inflation is one of the best PR machines big business could really hope for. In many ways it's the opiate of the poor. It's much more satisfying to think back to what your father's hourly wage was in 1977 and think proudly you're making more than him. But you might not be.

The graph of median household income can be misleading and much more telling when you adjust the numbers for inflation. In actuality, real median household income has increased 7.5% since 1984 after being adjusted for inflation. (The numbers might be different if you look back to the 1970s, this was just the years I picked for consistency). So how does that compare to the economy?

The GDP can be seen to plateau during the recession a little and in fact the inflation adjusted gains make it look like GDP hasn't gained that much either. But in fact, US GDP has increased 73.9% since 1984, and that's with inflation adjusted numbers. So when we hear about how much wages are increasing or not increasing or try to compare ourselves to previous generations and measure how far we've come inflation can make it look like we're getting our fair slice of the pie when we're really not. And that's why I think the powers that be will not do anything to slow inflation anytime soon as it covers up the risking income inequality in this country and the gains business and industry have made on the backs of American workers.

All of these data sets were pulled from the US Census Bureau and the US Bureau of Labor Statistics. I used the US BLS inflation calculator to adjust the raw data to an inflation baseline of 1984 when my data started.

Data Dump

I've been staring at lines of data lately and looking for trends. No, not economic trends like the above, but abnormal values or sustained low or high values of hardware that might explain equipment failures. Often the values from a test track each other, much like the large dips and jumps in the DOW Jones Industrial Average can be seen mirrored in gas prices. Both are no doubt related to some third value of consumer demand or consumer confidence or perhaps even industrial production or health of the economy depending on how far you want to extrapolate. Both are charging up right now, leading many to wonder if there isn't a bubble in the stock market. But gas prices we tend to expect will continue to rise as the economy recovers. We might even see rising gas prices lead to rising inflation which in general would not be good for the stock market.

 

But it's difficult to make any predictions on data you can't see. I've talked before about the problems of data extrapolation which I think are especially true when something pertains to the economy. And yet here I sit, strolling through a massive amount of data looking for trends or trying to predict when failures can occur. Even when it might be a binary failure that no data can predict, I must look for trends nonetheless.

The Rational Consumer

How reliable are economic models that depend on economic actors to act in their own best interest? I just watched the Nova documentary, Mind Over Money which displays various theories of economics as modelled by mathematical equations that expect us all to act in our own best interest or those who think emotions and behavior cause us to act irrationally.

 

They talk to Robert Shiller a Yale economist who it could be said predicted both the tech stock crash and the housing market crash as speculative bubbles. He argues against the rational consumer theory, stating that bubbles are not based on self interest. He talks about the "Tulip Mania" in the Netherlands in the 17th century, widely believed to be the first speculative bubble of which there are records. Tulips were relatively new and not unlike today they were trading tulip futures as well as actual tulip bulbs. At the peak, some of the most expensive tulip brands were selling a single bulb for 12 times the yearly income of a typical skilled craftsmen. While many attributed this bubble to crowd irrationality and use it as an example of behavioral economics (as does Shiller) many others try to draw rational explanations from this event. I still found it interesting that there could be such speculation on something that seemed to have very little intrinsic value whatsoever. But then, in the documentary they show that in studies even when "traders" are told a commodity has no value and will be completely without value at the end of they experiment they tend to take risks and buy creating a bubble and ending up busted in the end.

 

It's an interesting documentary, though I think Nova pushes the behavioral model a little too much. Though I agree and think it's folly to think that as a mass people will always act in their own self interest. The fact that people were willing to pay up to $600,000 for a three bedroom home a few years ago and now because they are underwater, but can still afford the payments, they often choose to walk away from their mortgage. If they kept paying they'd likely have some decent equity in their home. And hanging on to the home they can probably expect its price to eventually rise over time. But as is typical, we discount the future and make decisions that appear to be only in our immediate best interest. The immediate value of the home, and the immediate consequence of mortgage payments are more important than a forclosure on our financial records or lost equity or downpayment. The difficulty of obtaining equity in the future is discounted and the advantage of walking away now is considered more important.

 

Documentaries like this always make me worry about the stock market which I invest in, but secretly worry is some house of cards built on nothing. I worry about the price of homes as well as other bubbles and the stagnant wages of American workers right now. But at least you can live in a house. You can't live in a tulip.