The Economy is Just Fine . . .

Nothing to see here, move along, everything’s fine.

That’s what Gene Epstein, Barron’s Economic Beat columnist, and author of the book Econospinning: How to Read Between the Lines When the Media Manipulate the Numbers, is saying in this week’s magazine.

I was unsure as to where to begin in taking apart his column — its not that it is so densely packed with errors (that’s a given). Its that the author’s worldview is, well, from a different world than ours.   

"THESE ARE HARDLY THE BEST OF TIMES FOR THE U.S. ECONOMY. But they may not be as bad as you think. The credit crisis, stock-market crash and fall in home prices have raised legitimate fears of a nasty and protracted recession. Yet the economy has often proved more resilient than is commonly thought — and constructive factors that have gotten scant attention should help the U.S. skirt a deep recession. In fact, it’s possible that the downturn could prove to be one of the briefest and mildest on record.

The main positive is the huge boost to consumer spending that will come from the decline in energy costs. Although the run-up in oil, which punished consumers in the spring and summer, made front-page news, far less attention has been paid to the benefits of petroleum’s recent slide…

The cavalry hasn’t exactly swept in to rescue the economy. But the energy benefit could keep a significant recession at bay until reinforcements — particularly inventory rebuilding — arrive early next year, and as credit starts to flow more freely."

Where does one begin to fisk this? The Cavalry hasn’t swept in? You mean to say that nationalizing the finance sector of the US, guaranteeing $2 trillion dollars in lending an deposits, and cutting rates to 1.5% rates — thats not the cavalry?

And most economists understand why Oil is down — its called demand destruction. People stopped consuming it, because they cannot afford to. A global recession is deflating all manner of commodities. This is a bad thing, not a good thing.

This is economic cheerleading way, way beyond the ordinary mindless spinning. Its an entirely different order of magnitude. This guy makes my boy Kudlow look like a depressive.

He believes BLS data may be understating how great things are. In 1996, Epstein raised the question as to whether "millions of U.S. workers may be missing from the government’s jobs data." That’s right, he thinks BLS actually understates employment. I have never seen any questions about understating inflation, the impact on GDP, or any looking askance at Birth Death adjustment. Its no surprise his over-optimistic economic viewpoint has missed all manner of actual issues that matter to investors.

I don’t care about any single wrong view or forecast — its the methodology and body of work that matters. Rather than dissect Epstein’s column line-by-line, it might be more productive
to cherry pick a few of his prior columns. These are quite revealing:

Hard, Soft Or No Landing (NOVEMBER 6, 2006)  The author wrote: "The stock market’s rosy view may be vindicated." Only not so much.

GDP Prospects Flash Green (MARCH 5, 2007) The author forecast: "The economy should grow nicely this year and next."

Why Recession Is Remote (OCTOBER 8, 2007) This was precisely at the peak of the last expansion — we now know Real Wholesale-Retail trade sales peaked in September 2007, and Real Income hit its cyclical high in October ’07. (Employment was December 07, and Industrial Production was January 08). 

Housing Isn’t Clobbering GDP (OCTOBER 22, 2007)  It wasn’t ? Then why was Q4 GDP = -0.2%?   

Look for Joblessness to Hit 5.2% in Late ’08  (DECEMBER 10, 2007)  Wildly too optimistic — the Unemployment Rate rate was 6.1% in September 2008, and is likely to rise.

Outside of Housing, Things Are Humming (NOVEMBER 5, 2007) The credit crisis was already 4 months old when this insightful column came out. Aside from GDP being negative, relying on a dirt cheap dollar raises the question of what happens when that dollar rises — like it has this past quarter.

Slowdown, Not Recession
(FEBRUARY 4, 2008) The irony is  that NBER is likely to mark the
recession starting no later than February, based on their peak-to-trough definition.

Even Money on Recession  (MARCH 10, 2008)  That’s a small change from the column the month before.

The Great American Savings Myth (MAY 28, 2007) Facts have proven this to be clueless nonsense. "Household net worth — assets minus debt — has never been higher." As we warned at the time, asset prices can go down, while debt doesn’t — exactly what happened.

Why GDP Will Keep Growing (SEPTEMBER 29, 2008)  Thanks to high Imported Oil prices, GDP looks better than it is (high imported Oil makes the deflator artificially raise GDP.

Bottom line
: If you make investment decisions based on Barron’s Economic Beat columns, you’ve lost a lot of money.



Sorry, Chicken Little   
Barron’s October 20, 2008

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