Weekly Review: Deficits and the Economy

For those looking for true empirical evidence in economics face frustration. It is fairly easy to accumulate evidence to support any theory. Economists have yet to develop a formula that both identifies and quantifies the billion points which are the sum of the economy.

In the real world, any theory requires testing for proof. This test requires this one point of the economy to be adjusted according to the theory, and the other billion minus one points held constant. And that is the rub, all of our economic theory is based on billions of points moving simultaneously - and trying to "prove" that only one point made the economy better or worse.

In economics, empirical "truth" is not much more than competing theories put forth by dogmatic camps. Proof is shown by taking a few points of historical data - not the billion points which would create a chaotic and unprovable view of any theory. Further, the elements which comprise the economy are continuously morphing - the economic dynamics of the 1930's are significantly different than the 2010's.

The USA federal budget balancing debate is a case in point.

Dogmatically, I want to believe there are tipping points (drinking too little water - you die, drinking too much water - you die). Overall, balance is necessary. Therefore I naturally migrate to the view that over time, the budget must have balance.

The above graph includes the only recent economic period where the budget was balanced (the right scale value is for the red line with 1 being a balanced budget, a value >1 being a surplus,

Yet, economic performance started to degrade as the Federal Budget came into balance. Did the balanced budget cause this? What were the other major factors?

My mantra is the saying "be careful what you wish for, you might get it." I personally would love to prove a balanced budget is necessary for the economic health of a country. I have a hard time getting my head around there may be fundamental differences between your personal budget and a sovereign budget.

Is it possible a certain amount of deficit drives a modern economy?

Economic News this Week:

Econintersect’s economic forecast for June 2011 indicates growth in June will be less good.

This week the Weekly Leading Index (WLI) from ECRI declined from 4.1% to 3.7%. This level implies the business conditions six months from now will be approximately the same compared to today. This index is eroding and clearly in a downtrend. If the current trend line holds, this index will be in negative territory in 2 months.

The declining WLI and Econintersect's own index is in sharp contrast to the growing Leading Economic Index (analysis here).

Initial unemployment claims improved this week 16,000 to 414,000 but remains elevated, and the real gauge - the 4 week moving average - remained unchanged at 424,750 because of backward revision. Because of the noise (week-to-week movements), the 4 week average remains the reliable gauge. Historically, claims exceeding 400,000 per week yields employment gains less than the workforce growth.

weekly claims

We are continuing to see terrible April and May 2011 data. Econintersect’s previous economic forecasts predicted a growing economy but at cycle peaks. The data being released continues to indicate we are on the downside of cycle peaks – with the cycle peak likely being in March, or possibly April 2011. The data is less good, but not contracting.

Econintersect does not count surveys as data, nor believes they accurately forecast economic conditions.

Bankruptcies this Week: Xanadoo Holdings (fka Pegasus Satellite Communications Holdings), Perkins & Marie Callender's (fka The Restaurant Company)

Bank Failures this Week:

bank failures

Interactive version of the following table with active links is available here.

weekly table

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

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

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