New Gauge Anticipates 'Surprising' Turn of Events

Econbrowser's James Hamilton has highlighted a new forecasting gauge, developed by two private-sector and three academic economists and detailed in a 55-page report, "Financial Conditions Indexes: A Fresh Look after the Financial Crisis," which uses changes in 44 separate financial indicators to try and predict what will happen to the economy.

Interestingly enough, the FCI seems to be anticipating a turn of events that Professor Hamilton finds surprising (no doubt most of Wall Street will as well) [italics mine]:

Of particular interest at the moment is the fact that the HHMSW [an acronym formed from the first letter of the last name of each author] index, unlike most other indicators, shows a renewed deterioration subsequent to the initial recovery in the first part of 2009, a somewhat surprising result given the current steeply-sloping yield curve, low TED spread, and booming stock market.

(Source: Hatzius, et. al.)

According to Hamilton,

the surprising contrary inference from the HHMSW index appears to be due to two factors. First, the HHMSW index is based on the deviation of the financial indicators from what one would have predicted given recent economic conditions. Many indicators have not improved as much as one would have expected given the return to GDP growth, and the departure from a typical recovery pattern is viewed by the index as a highly pessimistic development. Second, the HHMSW index makes use not just of the yields themselves but also of the quantities of various assets, and many of these show little improvement so far. For example, issuance of new asset-backed securities remains quite low.

(Source: Hatzius, et. al.)

Will real GDP follow the HHMSW index back down? That's not what I'm expecting. But if it does, it wouldn't be the first time I've been wrong.

Comments

[jg]

Thanks, Michael, for posting this.

I quit reading Econbrowser because I was frustrated that Prof. Hamilton (and Chin) could not see past his 'mainstream economist' blinders. He's a very nice fellow (I live in San Diego and have chatted with him) and writes very well, but his diehard Keynesianism hinders his ability to see our grave debt overhang and its terrible implications.

This looks like a good posting to read, so I will venture back there for a peek.

[steve from virginia]

I just sent this paper to a friend of mine for examination and comment. He's a mathematician ...

Okay, moving right along ... the component of this new index ('Niewe Indexe') that matters more than the rest would have to be the price of crude oil - buried among the various interest rates. Tell me again why claims against resources are more important than the resources themselves?

I don't need no steenkin' niewe indexe to tell me whether the establishment's wishful thinking is justified or not. I simply look @ crude prices over on Bloomberg every day.

Over $45 and the economy is utterly, hopelessly completely doomed. At the current $80+ the economy is doomed faster. Talk about devaluing commerce ... who can afford $80 and make a profit from it?

Who? No wonder everyone is going broke!

[ctc wilson]

Takes no mathematician to see the numbers.. or, to know the reason. All that needs to be done is to look at the White House, the Congress, Pelosi,Reid, and Obamanation to know who they are controlled by; ask not for whom the bell tolls, the bell tells us that their owners are buying short; thus goes the nation, heading for a time far worse than 1929! Stand by, folks. It's really Howdy Doody time soon!

[Kenneth Lowndes]

It is time to ABANDONE ALL Central Banking Schemes, (such as the Federal Reserve) and RETURN to a Legitimate US Constitutional based monetary system and policy, -- OR -- we will be DESTROYED as a nation.
And that destruction is immanent.

We CAN do it, but we MUST do it ASAP. It can be implemented in as little as 60 days:

http://www.ivamu.com/

It is time to CHECK OUT OF the Federal Reserve Note System, and it is NOT time to go to bed with the unholy IMF.

"Choose Life, so that you and your children might live"

[Barry Hatfield]

Tea Baggers need to use the example of 18th. C. Scotland for good example of a free banking system. Where there is competitive issuance of money and no central bank. Scottish economy was very stable during this time, compared to England's boom, bust & panic under the Bank of England (Scotland's system was abolished in 1835 by England). We truly do not need a Fed, which is the root of our evil.

However, it begs the question of whether our politicians really do want a strong, stable system or not. By definition, weak, unstable systems are easier to manipulate and profit by in the short term - and let's face it, that's how politicians (and most capitalists) live, they are like street gangs who have never known anything different. You can't rehab them when they own the rehab owners.

[Harry H. Otsuji]

As a neophyte in these matters, it is interesting to note from a casual glance at Figure 5.1 that if the highs and the lows were connected onward from 1970, there seems to be a downward channel within which the fluctuations occur. It would be interesting to see this pattern, going back to the end of WW II. Is there any significance in this concerning the direction of the American economy, in the generation ahead?

[garrett zwart]

get ready to grab your ass! The big bump is comming

[Elizabeth]

Its back to basics. Learn from Grandma and Grandpa.

[davec]

I am surprised at least one or two posters can do math and have simple common sense out of less than 10 which to me is a high percentage. When I started reading these posts 100% of them were idiots and could not do this about 4 years ago: before the bigest lies and outright theft in the history of the US. It is actually encouraging!

[davec]

Most Americans are IDIOTS, All Economicsts including the ones in this article are idiots, liars, paid off or a combination of the above.

Simple math is the answer.

FIRST LIE, Banks lost money from toxic home sub prime mortgages. Common street hustlers are laughing from this because they can do the math they do every day on the FIG. If you borrow at less than 1% from the federal reserve and you loan at over 9% then as long as 30% pay the mortgage you make a LOT of money. Do the math yourself! Not counting the fact that PMI pays you when they default and the government writes it all off your taxes and you sell the home even at 10% of the loan and make money that year instead of waiting 30 years, remember it is the FIG that matters because the money did not come from the bank in the fist place. So they did not lose a penny they only have to pay the less than 1% interest on the money all you economic idiots on TV!

[davec]

All economists are liars, idiots, paid off or all of the above!

Simple math is the answer!

LIE #2
It took over 700 billion dollars to fix the banks,(which made money on mortgages, including sub prime)

Again math. At the time the money was given out less than 1 million homes were being foreclosed on that year with a less than 1 thousand dollars per month payment. So using worst case numbers.
1 million * 1 thousand * 12 months =12 billion

Yes that is right! 12 billion is the absolute most all the banks could lose on all the foreclosures that year but here are a few more math facts.

The banks were paying the interest to the federal reserve which only was asking for less than 1% back or less than 1/6 of the interest the banks were charging or 1/6 of the 12 billion, actually this is just estimation the number will be less than 2 billion!

So without getting out a calculator the banks at most were losing about 2 billion a year yet we gave them over 700 billion! What a bunch of idiots we have in congress or a bunch of thieves or a mixture!

Never mind the fee's the banks charge, the people who paid there mortgages, the pmi's. No wonder banks are making money and able to pay the TARP back in a year they did not need it in the first place! Again not a single economist in the USA said a single word about any of this! Did not see that on CNN wonder why?

[davec]

Lie #3
The Economy shrunk and GDP shrunk while the Chinese economy is growing and can produce things cheaper than the US. That is why we lost jobs, and can not produce enough jobs for at least most people to be employed in the US that are looking for jobs.

This actually is a little more complicated to understand but it can be proven with math. Taking a look at the worst hit sector which would be automobile manufacturing.

In the US a plant in 1990 could produce vehicles at about 30 units per hour at 10 hours per shift at 2 shifts per day at 6 days per week with about 6 thousand workers. or 30 * 10 *2 *6 *45weeks = 162,000 divided by 6,000 workers or

27 vehicles per year per worker and the companies could make money.

In 2009 the average US plant could produce vehicles at 80 units per hour at 10 hours per shift at 2 shifts per day at 6 days per week with about 1500 workers or
80 *10 * 2 * 6 *45 = 432 vehicles divided by 1500 workers or

288 vehicles per worker! Yet GM went bankrupt!

a productivity gain of over 1000% and they went Bankrupt, WHAT WHAT!!!!!!!!!!

In china they are lucky to work a 5 day week and it takes 10,000 workers to produce about 30 per hour or about

15 vehicles per worker per year! IN 2010 yet they are going gang busters!

Without going through all the math you will find that the worker the US is paid less than $50 per hour ( and the new workers they hire every day about $14 per hour)and if you take all his money away and have him work for free the cost of the vehicle is only going down less than $500.

Without going through all the math on using oil to ship the vehicles from China to the US it actually takes over $2000 just to ship the vehicle from china to the US.

So if the workers in the US worked for free, the cost of shipping the vehicle from China is $1500 more. The productivity in the US is 100 times better!

So why is China creating automobile jobs and the US is losing automobile Jobs!

It is the same for every commodity!

The math does not add up!

But one thing does!

The banks needed 700 billion dollars!

Not for mortgages!

We have about a 700 billion dollar trade inbalance because we are buying autos, everything from china that we can produce cheaper in the US. Somebody somewere has to pay for this somehow.

At the same time we are losing jobs at an alarming rate and the stock market is going up, What?

[davec]

The last lie because I am getting tired of typing.

The average person and the US can do nothing to reverse all of this!

Vote, protest, Vote some more and protest some more!

One law asking for domestic content on all military and all government purchased material, state, local and federal would put everyone back to work in less than one month! Do the math yourself.

Forget the current healthcare bill which is actually a insurance care bill which is like mario antionette saying let them eat cake. The reason 65 million americans do not have health care insurance is because they can not afford to eat and live and can not find employment to pay for it. So making them criminals by making it illegal not to pay for health care is crazy. Also those poor souls who do have money to pay for health care will pay more because the insurance companies will no longer have any competition because you the buyer have to buy no matter what. Do not believe it look at every state that has made it illegal not to have auto insurance. The rates in those states for the same insurance as states who allow you to drive withour insurance are 3 to 100 times more expensive, yes 100 times.

Again the law should be you insure yourselve not the other vehicle and if you drive without insurance than you can not sue anyone! Instead the law is you insure the other vehicle, how idiotic are we!

The health care law should be if you pay 1 thousand per year you get 10 thousand per year coverage that you can shop anywere any doctor or hospital to use in the US. That would drive do the prices and make things competitive and if you get cancer and only pay 1 thousand than you can only spend 10 thousand. Period! If you want more spend more. If you want better value for your buck go shop around! Instead the law is now you have to use there doctors there hospitals were they charge you outrageous prices because again no competition.

That I am sorry to say shows how we are all idiots!

[davec]

No economists read these posts?

I would have thought at least one would get upset and say something.

But alas it has been the same for 4 years no matter were I post.

Not one economist has said the numbers are wrong or stood up for themselves or went on CNN to say what a bunch of bullshit CNN along with the other news organizations are publishing.

We the US are the most technologically advanced country the world has ever seen able to feed most of the world, highly educated yet we are stupid enough to be fed bullshit every day and kept in the dark and told we should start living in cardboard huts and pay insurance companies blackmail money in TARP, and now health care insurance and we are too scared to protest and VOTE! And Protest and VOTE somemore until all the criminals, and idiots are removed.

Otherwise they will keep stealing your very soul.

[ima_nemisis]

Davec,

I like your style and message. Keep it up.

A believer,

Ima_Nemisis