Chicago Fed National Activity Index up sharply

From today’s report:

Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) increased to +0.10 in November from –0.64 in October. Two of the four broad categories of indicators that make up the index increased from October, but only the production and income category made a positive contribution to the index in November.


Available here.

Empire State Manufacturing Survey


From this morning’s report:

The December Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to decline at a modest pace.

The general business conditions index was negative for a fifth consecutive month, falling three points to -8.1.

The new orders index dropped to -3.7, while the shipments index declined six points to 8.8.

At 16.1, the prices paid index indicated that input prices continued to rise at a moderate pace, while the prices received index fell five points to 1.1, suggesting that selling prices were flat.

Employment indexes pointed to weaker labor market conditions, with the indexes for both number of employees and the average workweek registering values below zero for a second consecutive month.

Indexes for the six-month outlook were generally higher than last month, although the level of optimism remained at a level well below that seen earlier this year.

Full report here.

Economic indicators show rise in M2

M2 money supply component has recorded a rise of 7.3% for October on basically the unchanged monetary base – a hopeful sign of an increased financial activity that could lead to positive gains in output down the line.

The rise in this monetary measure comes, granted, after the announcement of the QE3 but it has reversed the consecutive declines recorded for most of the 2012.

We still need to see what effect all this has on monetary velocity which has continued to decline post-2008 recession – a negative occurrence which is why the “recovery” feels so anemic.

Other notable things in the updated economic indicators (via Richmond Fed) are the ISM and its components.

Manufacturing takes a tumble, data

From today’s release of the Empire State Manufacturing Survey:

The November Empire State Manufacturing Survey indicates that conditions for New York manufacturers declined at a modest pace.

The general business conditions index was negative for a fourth consecutive month, but was little changed at -5.2.

The new orders index rose above zero for the first time since June, although it was only slightly positive at 3.1.

The shipments index shot up twenty-one points to 14.6, its highest level since May.

The prices paid index fell three points to 14.6, indicating a modest increase in input prices, and the prices received index held steady at 5.6.

Labor market conditions were noticeably weaker. The index for number of employees fell fourteen points to -14.6, a sharp drop to its lowest level since 2009, and the average workweek index drifted down to -7.9.

Indexes for the six-month outlook were mixed, with the future general business conditions index declining seven points to 12.9, while the future new orders and shipments indexes rose.

No explanation for declining labor participation, paper

The declining labor participation rate is often singled out as an exemplar of why the post-2008 economic recovery is no good but the latest paper by Robert A. Moffitt from the Johns Hopkins University says that the declining trend in labor participation started in 2000, way before the Great Recession, and, despite various explanations, the labor participation lacks any convincing reason.
“The decline in the employment-population ratios for men and women over the period 2000-2007 prior to the Great Recession represents an historical turnaround in the evolution of U.S. employment,” writes Moffitt.
Although Moffitt does not explicitly state it, but his paper is viewed with evidence that may explain this phenomena one way but negate it another.

“The decline is disproportionately concentrated in the less educated and younger” finds Moffitt but the variables that explain the decline in the male participation have nothing to do with females.
For men, “declines in wage rates and changes in nonlabor income and family structure influences” but “these influences explain virtually none of the decline in employment among women.”
“Most other possible influences on employment rates also appear unlikely to have contributed to the 2000-2007 decline,” says Moffitt because taxes fell and transfer programs did not change.
“Changes in health status, the minimum wage, and other factors also appear to have not played a role. Whether changes in time use and home production accompanied the employment declines is not discernible with the available data, but could have occurred.”
Despite a fancy ordinary least squares (OLS) regression equation and attempts to fit it into the reality of labor participation, Moffitt’s paper is a compilation of things that clearly show what does not cause the decline in labor participation.
As such, the paper is a valuable contribution to the topic because it is often more valuable to know what is not the cause of a particular economic phenomena rather than just stubbornly carp, like some in the media, by alleging in an attempt to persuade by way of a convenient ideological belief rather that actual facts.

For all the talk, systemic risk has no definition

Since 2008, the phrase “systemic risk” has been on the lips of politicians, policy makers, academics and journalists but scarcely, if ever, did any of them consult anywhere as to what the definition of systemic risk is and what is its measure.

Of course, none could because there is no acceptable definition of it nor is there a widely accepted measure of systemic risk.

The fact that the infamous Dodd-Frank finance legislation rests on a nonexistent definition of the very phenomena it attempts to legislate is a rather oxymoronic predicament, and not just that it is over 2,319 pages long.

“The systemic risk research agenda aims to provide guidance about the consequences of alternative policies and to help anticipate potential breakdowns in financial markets. The formal definition of systemic risk is much less clear than its counterpart systematic risk,” writes Lars Peter Hansen from the University of Chicago in his just released paper Challenges in Identifying and Measuring Systemic Risk.

Worse yet, there is not even a widely accepted measurement of the systemic risk although various schemes for measuring it have mushroomed.

“As systemic risk remains a poorly understood concept, there is no ‘off the shelf’ model that we can use to measure it. Any stab at building such models, at least in the near future, is likely to yield, at best, a coarse approximation,” writes Hansen.

According to the Office of Financial Research at the US Department of the Treasury, there are 31 ways to measure systemic risk – an “embarrassment of riches” that perhaps just adds to the confusion.

Hansen says that systemic risk cannot be measured but instead we should focus on systemic uncertainty.

“Even as we add modeling clarity, in my view we need to abandon the presumption that we can measure fully systemic risk and go after the conceptually more difficult notion of quantifying systemic uncertainty,” says Hansen.

Before even spitting out a probability number for an outcome of an event, risk understands, first, that an event could possibly exist in the future that could adversely alter financial circumstance of at least one financial party. Uncertainty, however, refers to a situation where something will happen but market participants have no clue what that event will be.

So, how does one measure events that one has no clue what they could be?

Hansen leaves that for the econometricians but instead he is confident that the “concerns about systemic uncertainty would still seem to be a potential contributor to the implementation of even seemingly simple rules for financial regulation.”

… like, few pages less than Dodd-Frank’s 2,319?

On the Web:
- Challenges in Identifying and Measuring Systemic Risk by Lars Peter Hansen
- A Survey of Systemic Risk Analytics by Dimitrios Bisias, Mark Flood, Andrew W. Lo, Stavros Valavanis, Office of Financial Research.

Forecaster unchanged on growth

Economic forecasters surveyed by the Philly Fed are holding unchanged view on GDP growth from the survey 3 months ago, latest report says.

“The forecasters expect real GDP to grow at an annual rate of 1.8 percent this quarter, down from the previous estimate of 2.2 percent. Over the next three quarters, they expect GDP growth to average 2.1 percent, down from the previous average of 2.2 percent,’ Fed says.

Unemployment forecasts are also little changed with “nonfarm payroll employment [seen] growing at a rate of 148,700 jobs per month this quarter and 127,400 jobs per month next quarter.”

The GDP density distribution chart above has shifted to the right somewhat as forecasters have decreased the probability of lower GDP range.

Full report & charts available here.

National Economic Indicators – November Edition

Some indicators in the latest Richmond Fed’s bi-weekly charts and tables are pointing towards an upward trajectory – as some of the entries in the Business Survey snapshot below indicate.

Of particular interest was behavior of prices as measured by the Consumer Expenditure Price Index.

Back in July, we dabbled here (see Is Fed’s CPI forecast signaling a QE) that this price index was foretelling that the Fed is at a cusp of announcing another QE because, back than, this index was falling down towards the red-line of 1%, a trajectory that is incongruent, all on its own, with the Fed’s projected price path sketched with the light blue rectangles.

Well, since the QE III, the index has – who would have guessed - bounced off that red-line and is floating gently upwards just as the Fed told us in July that it would.

All charts available here.