VooDoo Economics or Current Economics?

October 10, 2014 — 06:44 am EDT

This past week Nobel Laureate Professor Paul Krugman OpEd:

Some time ago I wrote a post on political parties control of the Presidency and Congress - and that lack of correlation to the middle class (both parties were equally bad). Here is a graph from that post taking a median income chart, and overlaying the party in control of Congress.

income by congress control

I have on occasion disagreed with the Congressional Budget Office (CBO) findings and estimates - but NEVER perceived a political bias in their work. Their studies on raising the minimum wage did not sit well with the left, and likewise cost estimates on extending the unemployment insurance did not sit well with the right. But even in periods of full control by a single political party - there is no evidence of a new economic bent in their work.

How does the CBO maintain neutrality?:

It is the link abut CBO transparency and and objectivity which should be read by all [click here]. Professor Krugman believes it is dangerous to have a single party in control of Congress (he never objected when Democrats were in full control). Could he be biased?

What was important last week was a little read study from the Cleveland Fed which has significant implications relating to consumption shares of luxuries and necessities. From the study:

As figure 3 illustrates, the relative consumption shares of luxuries and necessities vary greatly between income groups. From the different graphs one can see that, as the income level increases, luxury items account for a greater share of the consumer’s market basket. While it is true that all income groups reduced their consumption of necessities over the analysis period, the rate at which they transitioned into consuming greater amounts of luxuries differed greatly across groups. As the results in both table 1 and figure 3 detail, the lowest and highest income quintiles were the most invariant over time with respect to their consumption of luxury goods. Middle income consumers experienced the greatest variation of all the groups. Their consumption of necessities declined by 12.2 percentage points over the analysis period, while their consumption of luxuries increased the most—rising by 6.2 percentage points.

In theory, if real income is flat - the percentages spent on necessities or luxuries should be consistent between periods. It is difficult to understand why the expenditures for luxuries + necessities did not always add to 100% in the study.
In any event, the implications of this Cleveland Fed study merits more review. and paints a picture of a decline in American consumer fiscal health. Professor Krugman worries about a return to VooDoo economics - I worry about those who think the current economic system is working.
Other Economic News this Week:
The Econintersect Economic Index for September 2014 is showing our index declined from last months 3 year high. Outside of our economic forecast - we are worried about the consumers' ability to expand consumption although data is now showing consumer income is now growing faster than expenditures growth. The GDP expansion of 4.2% in 2Q2014 is overstated as 2.1% of the growth would be making up for the contraction in 1Q2014, and 1.4% of the growth is due to an inventory build. Still, there are no warning signs that the economy is stalling.
The ECRI WLI growth index value has been weakly in positive territory for almost two years. The index is indicating the economy six month from today will be slightly better than it is today.
Current ECRI WLI Growth Index

The market was expecting the weekly initial unemployment claims at 285,000 to 295,000 (consensus 293,000) vs the 287,000 reported. The more important (because of the volatility in the weekly reported claims and seasonality errors in adjusting the data) 4 week moving average moved from 295,000 (reported last week as 294,750) to 287,750.
Weekly Initial Unemployment Claims - 4 Week Average - Seasonally Adjusted - 2011 (red line), 2012 (green line), 2013 (blue line), 2014 (orange line)

/images/z unemployment.PNG
Bankruptcies this Week: GT Advanced Technologies
[click on scorecard to view page with active hyperlinks]

scorecard
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.