August 09, 2011
The NYT got a bit overenthusiastic about the prospects for a double-dip recession. It told readers:
“the most recent government reports of consumer spending and factory orders show that both have been falling.”
This is not quite right. The most recent data on consumer spending showed that it was flat in June. The key category in factory orders is orders for capital goods. This represents investment demand, which reflects firms’ confidence about future business prospects. Excluding aircraft (which are highly volatile) new orders for capital goods rose 1.1 percent in June after rising 1.7 percent in May. (The numbers would be roughly the same if aircraft are included.)
The article also includes a peculiar discussion of the housing market and its impact on the economy. It told readers:
“Some housing experts warn that further declines in home prices could help set off another recession. ‘The wait-and-see attitude begets more bad economic data, and it can become a self-fulfilling prophecy,’ said Andrew D. Goldberg, market strategist for J.P. Morgan Funds, an asset manager.
“The downward cycle that could be at play is known by some economists as a ‘feedback loop’ — when one piece of bad economic data has a way of making everything else worse.”
Actually, we should fully expect a further decline in house prices since house prices are still about 10 percent above their long-term trend level. This decline in house prices will likely be associated with a further rise in the savings rate from its current 5 percent level, back to its pre-bubble post-war average of 8 percent.
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