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January 2009 Quarterly Forecast
> The Nation: You Haven’t Seen THAT Before!
Edward E. Leamer, Director, UCLA Anderson Forecast
Forecasting depends on some reasonable similarity between the current situation and episodes in the historical data. But there is SOOO MUCH over the last several months that we haven’t seen before. These abnormalities limit the power of statistical forecasting, forcing us to rely more on hunches. Just so you know, here are some of the features of the data that are so unusual, as well as some that are not that strange.
Housing starts in October were down to 791 thousand at an annual rate, edging out the former record holders: 798 in January 1991 and 843 in January 1982. (These are seasonally adjusted data, by the way.) This looks a lot worse when adjusted for the size of the workforce. The ratio of payroll jobs per housing starts jumped to 173 in October, far surpassing the January 1991 rate of 136 jobs per housing start. Residential investment through 2008q3 has been subtracting from GDP for 11 straight quarters, starting in 2006 Q1. This matches the longest string of negatives since 1947 when these quarterly data commence. The cumulative reduction in GDP from softness in housing is already the greatest ever.
Sales of Autos and Light Trucks plummeted in October to 10.5 million units per year from 12.5 the month earlier. This is the lowest level of sales since 1983. Expressed differently, the ratio of jobs to autos sold jumped to 13 in October, much higher than the previous record of 10.3 jobs per auto in December 1983.
Real retail sales which peaked in May 2007 were declining significantly in the first half of 2008, but after a very bad September and a terrible October were down 5.8%, a number not approached in the 2001 recession, or in any period for which the NAICS data are available commencing in 1992.
The November 20 level of the Dow was 7500, 44% lower than a year earlier. That exceeds the decline in any period in the 20th Century except the Great Depression, which had a 72% year-over-year decline in June 1932, and the subsequent recession which had a 55% decline in the year ending March 1936.
The 3-month Treasury yield 0.01 on Oct 21, 2008 tied with January 1940 for the lowest ever, though only because of rounding error. The 10-Year Treasury yield on 3.1% on November 2008 is the lowest since the 1950s.
The annualized rate of decline of the CPI in October 2008 equal to -10.9 percent is the greatest since 1937, but was matched several times in the deflations of the first half of the 20th Century. The spread of 5.6 points between the rate on Moody’s AAA corporate bonds and the 3-month Treasury is the greatest in the recorded history.
That’s a lot of weird stuff, particularly because the real economy is not all that unusual. Here are three items that are not that strange: 1) The October 2008 decline in industrial production by 5.9% from it’s previous peak falls short of the decline in most previous recessions in the second half of the 20th Century and is way short of the catastrophic declines in the recessions of the first half of the 20th Century; 2) The October 2008 decline in payroll jobs from the previous peak is only 0.9%, considerably below the recessions since 1947; and 3) The rise in the unemployment rate to 6.5 in October 2008 is very similar to past recessions.
Back to the Q1 2009 East Bay Forecast
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