Saturday, April 9, 2016

Why Is Macro So Hard? Repeating the Bad News but Not the Good

Humans are weird. We like to hear bad news, particularly if it’s about others, or if we can use it to gain sympathy for ourselves without actually getting hurt.

In macroeconomics, this means that you will be exposed to less news stories about the economy when it is doing well, and more when it is doing poorly.

We are currently towards the end of a weak expansion, maybe around a peak. This is prime time for bad news plus the same bad news.

Three months back, the news was that forecasting models were indicating that the economy was that the economy might be peaking soon (we discussed this here and here). Now the news is that real GDP growth for the first quarter of 2016 is going to come in around zero (the linked article is required reading). If you think about it, they mean the same thing.

The closely watched Atlanta Fed GDPNow model now shows first-quarter growth tracking at 0.1 percent, compared to a 0.4 percent estimate earlier in the week.

Do note that I’m not saying that both of these items are not news. Instead, what I am saying is that “evidence that we’re peaking and evidence that we peaked” is covered more than “evidence that we’re not peaking and evidence that we did not peak”. But, given the fact that the economy tends to be in expansion about three times as much as it’s in contraction, we should actually hear more about the latter.


One problem with cyclical industries is that they overproduce and then have to pull back production and draw down their inventories. Some are of the view that the first quarter was a pull back, and that this is a good sign for the second quarter:

The JPMorgan economists, however, say there may be light at the end of the tunnel.

"While 1Q is adding up to be a clear disappointment relative to expectations from a few weeks ago, it now looks like the inventory correction was largely completed by the start of the second quarter, which is a favorable development for growth in that period. We now think that real inventories increased $54bn saar in 1Q, a rate that is likely to be sustainable moving forward," wrote JPMorgan economist Daniel Silver, in a note.

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