Talking Down the Economy?

Over at Econbrowser, James Hamilton points out that some of the recent fretting about the economy is misplaced. The gloom is apparently about the modest rise in retail sales.

WASHINGTON Sep 14, 2006 (AP)— Retail sales posted only a modest gain in August as worried consumers got hit anew with sticker-shock at the gasoline pumps.

The nation’s retailers recorded a tiny 0.2 percent increase following a much bigger 1.4 percent rise in July. It was the weakest performance since sales had actually fallen by 0.5 percent in June.

But Prof. Hamilton charts retail sales for 2004, 2005 and 2006 both seasonally unadjusted and adjusted. First up is the data without seasonal adjustments. Note that while the retail sales increase is small retail sales over all are at their highest in 2006 on a month-by-month comparison. Further, as Prof. Hamilton notes, the downward trend from earlier in the summer seems to over.


Adjusting for seasonal factors we get this chart,


Again we see that 2006 is better than the previous years on a month-by-month comparison. As Prof. Hamilton notes, “If this is the worst we’ve got, we’re in pretty good shape.”

However, Prof. Hamilton points to something that could be a sign of concern. Tax receipts seem to be dropping off when looked at on a monthly basis,


If the economy is cooling down and overall economic activity is on a decline, then one would expect tax receipts to also decline. Thus, this could be the first signs of a slowdown in the economy. However, as Prof. Hamilton rightly notes, this series is rather noisy so it is hard to tell if this drop is significant or not. The most recent couple of months aren’t all that dissimilar from October and November of 2005.

Basically, there is little reason to be overly worried about the economy. While a cautious outlook might be wise, being downbeat strikes me as just being overly pessimistic.

Update: Well, Ed Leamer, a respected economist, has a more pessimistic view.

Housing Bubble to Deflate; Recession to Follow

That [headline is] the prognostication of economist Ed Leamer:

In Leamer’s view, the housing market appears to have peaked “in California and elsewhere. It will take more than a year for this weakness to turn into job losses and to affect the economy in general.” [emphasis added]

And, yes, he’s using the “R” word. As in “recession.”

Leamer lays the blame squarely on the Federal Reserve for leaving interest rates too low for too long. Now, he says, we’re not only heading for trouble in the housing sector, but in the auto industry — another market that got drunk on historically low rates.

Low borrowing costs accelerated future sales by enticing consumers to trade up to bigger homes and new vehicles sooner than they might have done otherwise. Instead of waiting to buy a new family car in a couple of years, folks said, “Oh, what the heck. Financing is so cheap we might as well get it today.” As a result, car dealers lose the sale they would have gotten two years from now.

As rates creep higher, consumers happily driving their new cars or living in their larger homes have no motivation to purchase additional ones. Since consumer spending drives two-thirds of our economy, when consumers close their wallets, the impact is far-reaching.

Well, with this new information, everybody update your priors. And while you’re at it include the information from Barry Ritzholtz.

Another Update: Here is some more of Ed Leamer’s views on recessions and the economy.

If you ask Ed Leamer at the UCLA Anderson Forecast what nine out of 10 recessions look like in their early stages, he’ll tell you straight out: A decline in housing transactions.

So, this week’s LA Business Journal headline “Offices Shutting Down as Home Sales Plunge,” is at least a bit disquieting, though hardly unexpected.

The scenario set out is pretty much in line with what Leamer has said has always led to recession: transactions are falling off. Real estate agents are being put out of work along with their brethren in the mortgage brokering, construction and remodeling businesses. They will spend less. That’s less for housing and less for other durables. The impacts will multiply through the economy as those two largest sectors slow down.

And this article as well.

“This soft-landing scenario is a fantasy,” says Ed Leamer, director of the UCLA Anderson Forecast.

While he doesn’t expect a recession in the next year, he predicts the housing slowdown will be nastier than the Fed projects, hurting consumer spending, jobs and growth. “Anything housing-related is going to feel like a recession, almost like a depression.”

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Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.


  1. A question for Mr. Hamilton: Does this statement, “Retail sales posted only a modest gain in August as worried consumers got hit anew with sticker-shock at the gasoline pumps.”, now merit a complete reconsideration with gasoline as low as $1.85?

    A question for Mr. Leamer: Don’t those consumers living in the larger homes want to furnish them?

    All of this looks like material selectively chosen to support a preconceived notion. But hey, Stephen Green will be glad he’s no longer the only person peddling deflation.

  2. Sine Nomine says:

    How about all the states that have “Tax Free Days”

    to indicate a DECREASE in sales tax collections!!

  3. Matt says:

    Lol economy is OK in some places. But, not looking good in most. Bad and getting worse in the Midwest -not good for Repubs this fall. Fuel prices were too high for too long to recover quickly, my thoughts anyway.

    I know from talking to friends in manufacturing that the unreasonable high energy prices this year will cause them to have a down year.

  4. Fersboo says:

    Lol economy is OK in some places. But, not looking good in most. Bad and getting worse in the Midwest -not good for Repubs this fall. Fuel prices were too high for too long to recover quickly, my thoughts anyway.

    Does the Midwest suffer from greater unemployment than the nation is averaging? What indicators can you provide that the Midwest is getting worse?

  5. One question I would ask about the housing “slow down” is slowed down relative to what. For a while we had extremely low prime interest rate. This in turn meant that mortgages could be had with monthly payments much lower. Even if you got a “fixed rate”. So I would expect a lot of people entered the market, trading up or buying for the first time. Interest rates have gone back up, but while you can argue should they be +/- 1% they are no where near historical highs/lows. Given the +/-1%, they are where I “expect” them to be. So we should be entering a period of the housing market getting back to “normal” after an “abnormal” time due to the low interest rates. The fluctuations for getting back to normal should be expected as part of this. People who would have moved up this year did so two years ago and won’t do so again this year. Some people will have failed ECO101 and over extended themselves. As long as the entire system isn’t under damped do it spirals out of control, then this is all to be expected.

    So I would want to see the number of houses transferring in context to other points in history, adjusted for population changes (including aging), economic factors etc.

  6. Fersboo,

    If the Midwest is defined as Michigan, then it absolutely is lagging the nation in terms of unemployment. The rest, not so much.

  7. Steve Verdon says:


    So I would want to see the number of houses transferring in context to other points in history, adjusted for population changes (including aging), economic factors etc.

    Try here.

  8. Ray says:

    Other things I don’t think the economists are taking into account:

    Repair and upgrading of existing homes. Are existing home owners upgrading their properties? I’ve seen lots of repair and construction (like a new roof or a room addition) going on here in MPLS and more construction starts every month. Granted, the summer building season is almost over, so most construction will not be obvious, but it seems to be continuing. Doesn’t this point to a strong economy?

    Seasonal trends in retail sales. I’ve found that retail sales seems to decrease at the end of summer. After the summer sales period is over and following the short back to school sales drive, retail sales will slow for a few months until the winter shopping drive occurs (Christmas). Sales will slow again until spring when sales will pick up. That’s my experience anyways.

    The Back to School effect. During the summer, tens of thousands of kids are out spending money. These kids, mostly in the 10 to 18 year old range, spend a lot of money during summer break. These kids still spend money during school season, but that spending is a lot less then during summer break. That’s something every parent knows. Kids like to have fun during the summer and that means revenue to those business’s that tailor to those kids. A drop in retail sales during school season is not a indication of a weak economy, it’s an indication of a large portion of the consumer base doing something other than spending money. Do any economists include this data in their studies?

    Personally, I don’t see any real threat to our economy in the near future. I think the economy will slow a bit in the immediate future, but it always does that during the winter months so I don’t think it’s anything to worry about.

    That’s my two cents worth anyways. (You get a lot for two cents)