Interview on Fed Models, and an Esoteric Long Leading Index
Summary of topics discussed on the Bloomberg Surveillance podcast:
Q: The Fed has been criticized for not including financial markets in their model. Does ECRI use financial market data?
A: Yes, we do use financial market data, although we don’t use models per se. In addition to using market data we also use government and private sector data sources.
Q: What kind of lead does market data have?
A: Market data tends to provide what we call “short leading” indicators of economic growth.
Q: What’s the most import leading index that you watch?
A: While there’s no Holy Grail of economic forecasting, long leads are useful, and our Global Industrial Growth Long Leading Index has one of the longest leads. It’s an esoteric indicator that not many people know about, based on inputs to 20 separate long leading indexes for major international economies. The GIGLLI leads global industrial production growth by almost one year.
Q: ECRI 1% long-term trend growth statistic is stunning, how did you come up with that?
A: Our “simple math” calculation makes it plain for all to see. When you cut through all the smoke and mirrors, real growth is made up of demographic growth plus productivity growth. The CBO expects less than half a percent annual potential labor force growth over the next 10 years, and we’ve seen half a percent labor productivity growth over the past five years, adding up to around 1% long-term trend growth.
Most policy prescriptions miss this mark. Unless there’s a coherent policy to move productivity growth up, trend growth will fall far short of expectations.
Q: ECRI talks of growth rate cycles, and that can push against some of the “happy talk” out there. Can you explain?
A: We are focused on turning points, and growth rate cycles capture accelerations and decelerations in growth. We’ve been in a GRC downturn since early 2015, something that we anticipated. Today the question is if the slowdown will culminate in a recession or a reacceleration that gives us the proverbial soft-landing.
Stepping back, most economists look at growth quite differently, focusing on whether it’s been above or below trend, as opposed to the periods of accelerating and decelerating growth that define a growth rate cycle.