Are We Too Gloomy?

Thursday, June 19, 2008 | 07:24 AM

That's the question asked by the Washington Post:

"Soft? You betcha. In recession? Quite possibly. And a crisis in the financial markets has rattled nerves for months now. But so far, the economy is holding up better than it did during the last two recessions in 1990 and 2001. Employers haven't shed as many jobs, the unemployment rate is still relatively low, and gross domestic product has kept rising. Things are nowhere near as bad as they were in the Great Depression, or even during the severe recession of 1982-83. The last time consumers were this miserable, in May 1980, the jobless rate was 7.5 percent and inflation was 14.4 percent. Now those numbers are 5.5 percent and 4.2 percent respectively."

The naked comparison between the stats today versus 25 years ago -- without some context -- is misleading, and perhaps revealing of economic naiveté. Even if you take the headline data at face value (which you never should), one must acknowledge the many changes which have been made over the years to how the BLS models are constructed. It becomes an apples to oranges comparison. Perhaps the fault lies not within ourselves, but within our data.

Instead, we should be asking different questions of our financial media"How economically literate Is our press? What degree of statistical naiveté is endemic to mass media? Why our some of the financial media mere stenographers? What happened to critical thought, analytical rigor or investigative journalism? Wasn't the charge of the press at one time to "afflict the comfortable?"

To be blunt, any scribe that trots out the headline data on Unemployment or Inflation as gospel are fools or liars.

Of course, there are other possibilities:  IIt could be that we Americans are ungrateful; we are morons, too dumb to understand just how good we have it. Or, another other option is that the official models, like every mathematical depiction of reality, are flawed. It is not that they are worthless, it is that they are an imprecise and inaccurate depiction of the real world. They cannot be anything but, as they are merely a partial depiction of the universe.

Do not think that the present issue is whether any model is right or wrong; All models are wrong. The true question for interested statisticians, mathematicians and economists is just how wrong are they?   

Here are a few clues for those who do not seem to understand why so many Americans seem so unhappy despite the current state of economic affairs in the world:

• Prices have far outstripped wage and income growth, leading to the first major decrease in the standard of living in the US in the modern era.

• Its more than food and energy prices -- medical care and education costs have gone up 10-15% per year, local municipal and property taxes are rapidly rising, and yes, even free-falling housing remains considerably higher relative to median income.

• The US savings rate flipped into negative territory for the first time since the Great Depression. That doesn't mean we are going to go into a depression -- but its no reason to be cheerful.

• Curiously, this article on sentiment failed to mention either of the words "Iraq" or "War." How in a discussion on psychology, can there was no mention of War fatigue? There is a weariness related to the ongoing costs and casualties of the Iraq War, even as it slides off the front pages. It has worn on the national psyche for more than 5 years. Yet that was not worthy of any mention; That reeks of hackdom.

• We are barely a quarter or two into what is still not acknowledged as a recession by many. The danger, reflected in Sentiment data, is that the economy rolls into something far uglier --a deeper and more prolonged contraction.

As to the broader state of the economy, let me direct the author of this one column to yesterday's Federal Express (FDX) earnings. The economic bellwhether's report were nothing short of fugly. FedEx management issued an inflationary-recession view of the economy. FedEx lost $241m due to what they called "soaring fuel costs and a very difficult economic environment." They are primarily a business-to-business shipper, but UPS, their more consumer oriented competitor, had very similar things to say. In terms of future guidance, FedEx CFO Alan Graf said that the coming year will be “very difficult due to the weak U.S. economy and extremely high fuel prices.”

Gee, that doesn't sound like our economic woes are psychosomatic. 


We have discussed over the past 5 years how inflation is so much worse than reported. The latest pushback against this meme has been not only wrong, but lame. Its a difficult argument to make, and this is a typical weak example of exactly why that is.

I'll have more on some other inflation related nonsense later today; tomorrow, we will look at those who accuse we who challenge the official data as tin foil hat wearing, grand conspiracy theorists . . .


Consumer Sentiment Hits 28 Year Lows (June 2008)

Why We're Gloomier Than The Economy; Consumer Anxiety Outstrips the Data
Neil Irwin
Washington Post, June 18, 2008; Page A01

FedEx Has First Loss in 11 Years; Profit to Decline 
Mary Jane Credeur   
Bloomberg, June 18 2008

Hard numbers: The economy is worse than you know
Kevin Phillips
Harper's Magazine, Sunday, April 27, 2008


Thursday, June 19, 2008 | 07:24 AM | Permalink | Comments (53) | TrackBack (1) add to | digg digg this! | technorati add to technorati | email email this post



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» Pervasive Pollyannas of Prosperity from The Big Picture
David Leonhardt discusses a few items today which are regular discussion points here at TBP. My favorite lately is why the public is so much gloomier than the pundits: Pundits have been scratching their heads about why the public mood is so grim. Last ... [Read More]

Tracked on Jul 4, 2008 11:04:15 AM


I found 3 things interesting in FDX.

1. they talked a lot about demand being elastic. Consumers are trading down from express to ground.

2. trends continued to get worse after the qtr ended.

3. they currently plan to maintain service levels at the expense of margins. They can't pass all their higher costs on.

If you want to listen to a really gloomy call listen to KMX. They are the largest used car dealer in the country. CEO said the used SUV market crashed last qtr.

"During the quarter, wholesale industry prices for SUVs and trucks declined nearly 25%, which is approximately four times the normal depreciation expected over this period and well in excess of the depreciation expected over a full year. "This is the most rapid depreciation of any vehicle segment that we have experienced in our 15 years," said Folliard."

Everyone who has an SUV and a loan is underwater.

Just a nitpick but FDX didn't have an operating loss. The loss was due to writedown of Kinko's.

Posted by: Vermont Trader | Jun 19, 2008 7:55:38 AM

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