Insights 1: Econs and Humans

I am launching a new series – called “Insights” – that will include posts on brief statements of wisdom or viewpoints that I come across in my readings or other sources. My hope is that this will pique your curiosity and encourage further exploration of the topic.

The first insight comes from Dr. Daniel Kahneman. I just finished reading his book, Thinking, Fast and Slow, which is full of great insights, especially if you have an interested in human behavior and economics. If you have not read it, I highly recommend it.

In this passage from the book, an “Econ” is the name given to the fictitious person modeled in neoclassical economics.

In a nation of Econs, government should keep out of the way, allowing the Econs to act as they choose, so long as they do not harm others. If a motorcycle rider chooses to ride without a helmet, a libertarian will support his right to do so. Citizens know what they are doing, even when they choose not to save for their old age, or when they expose themselves to addictive substances. There is sometimes a hard edge to this position: elderly people who did not save for retirement get little more sympathy than someone who complains about the bill after consuming a large meal at a restaurant. Much is therefore at stake in the debate between the Chicago school and the behavioral economists, who reject the extreme form of the rational-agent model. Freedom is not a contested value; all the participants in the debate are in favor of it. But life is more complex for behavioral economists than for true believers in human rationality. No behavioral economists favors a state that will force its citizens to eat a balanced diet and to watch only television shows that are good for the soul. For behavioral economists, however, freedom has a cost, which is borne by individuals who make bad choices, and by a society that feels obligated to help them. The decision of whether or not to protect individuals against their mistakes therefore presents a dilemma for behavioral economists. The economists of the Chicago school do not face that problem, because rational agents do not make mistakes. For adherents of this school, freedom is free of charge (p. 412).

Source:

Kahneman, D. (2011). Thinking, Fast and Slow. New York, NY: Farrar, Straus, and Giroux.

Using Data to Foster International Trade, Foreign Direct Investment, and Collaborations Among Metropolitan Areas

The City of San Antonio has been engaged in a six-year process to identify opportunities in foreign markets for international trade, foreign direct investment, and institutional collaborations. The effort was lead by The Brookings Institution, and with the support of JPMorgan Chase, the final portion of the process, called the Global Cities Initiative, was recently completed. In this stage of the process, each of the nine cities involved in the process selected an industry or two on which to focus their efforts in determining these global opportunities. In the case of San Antonio, our specific focus was on the cybersecurity industry. The culmination of the work was the release of the report by The Brookings Institution, Six Steps for Metro Areas to Prioritize Global Markets.

The six steps include:

  1. Organize for action
  2. Select a priority specialization
  3. Set the goal
  4. Measure global market opportunity within the specialization
  5. Factor in market accessibility
  6. Combine and synthesize data

As they are listed, these steps are rather generic and do not say much. I was fortunate and honored to be a part of the San Antonio team working on the project, so I can say with first-hand knowledge, it is quite a thorough process that has educated and enriched the knowledge of the communities involved about the opportunities in cities around the world for particular industries. I am sure it can do the same for other cities that want to engage in the process. If you want to get into the detail, I highly recommend you read through the report authored by Max Bouchet, Marek Gootman, and Joseph Parilla of The Brookings Institution. It can be found here.

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Unemployment Rate in San Antonio at Its Floor

The unemployment rate in San Antonio in July was at a seasonally adjusted rate of 3.2%. Since May 2017, it has been in the range of 3.1-3.5% each month. This is about as low as the unemployment rate has ever been in San Antonio since January 1990, as far back as the data goes. The lowest it ever got was in March and May 1999 when it reached 2.9% in each of those months.

As shown in the graph, for about the past year, the unemployment rate has been near the level it was during the dot come bubble leading into the recession in 2000 and about one-half to almost a full percentage point lower than the unemployment rate during the housing bubble preceding the Great Recession.

It seems to me that the San Antonio economy has been at its full-employment level of unemployment, so it is most likely the unemployment rate will only be going up over the next year or so. It may continue to hover in the aforementioned range for several months, but it appears to have hit its floor.

 

Unemployment SA July 2018

 

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Accounting for Non-Market Activities and Equal Pay in the San Antonio GDP

Dr. Belinda Roman and I recently completed a working paper titled, Women in the Economy. It is the first paper completed in our new research program on women in the economy. One of the many shortcomings of the gross domestic product measure is that it excludes any activity that is not conducted within a market (i.e., non-market activities). A large component of non-market activities is household production. This includes any activity it takes to run a household for which the activity is not paid, like child-care, meal preparation, yard work, and house cleaning that is done by the residents of the household. One focus of the paper was to measure the value of non-market household production in San Antonio. We also measured the addition to GDP if women received equal pay in the labor market. The following chart summarizes the results.

Slide1

As shown in the table, placing a market value on household production would add an additional $20.8 billion to GDP in San Antonio. it should be noted that household production includes the production by both men and women, but time use data indicate that women conduct the vast majority of household production. Additionally, if women received equal pay, another $18.2 billion would be added to GDP. Accounting for these two components of economic activity would raise GDP in San Antonio from $109.3 billion  to $148.3 billion in 2016.

We also recently published an op-ed article in the San Antonio Express-News that summarizes the study. The article can be found here.

Yield Curve Continues to Trend Toward Inverting – Strong Indicator of Recession

Yesterday The New York Times published an article titled, “What’s the Yield Curve? ‘A Powerful Signal of Recessions’ Has Wall Street’s Attention” (https://www.nytimes.com/2018/06/25/business/what-is-yield-curve-recession-prediction.html). If you have the time, it is worth a read because the author, Matt Phillips, discusses the importance of the yield as a predictor of recessions. As I have discussed in at least one previous blog post, the yield curve is one of the best indicators of recessions. As Phillips notes, “every recession of the past 60 years has been preceded by an inverted yield curve, according to research from the San Francisco Fed.”

The graph below shows the yield curve through June 25, 2018. The gray bars indicate recessions, so the relationship between the inversion of the yield curve and recessions is pretty clear. It is also pretty clear that the yield curve is trending toward flattening (i.e., approaching zero in the graph). As noted in the article, the inversion of the yield curve does not give much of an indication of when the recession will occur, except that it will be in the fairly near future. As I have mentioned before, I think we will see the U.S. economy dip into recession by late 2019 at the earliest or sometime in 2020.

Yield curve thru 6-25-18

 

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U.S. Economic Expansion Now Second Longest in History

The U.S. economic expansion is now the second longest in history at 107 months.

Of course, this is great, but I think we also have to consider the possibility that the economy is going to run out of steam in the near future and start to go in another direction.

My thought is that by the end of 2019 or at least in 2020, this will start to occur. As shown in the following table, the expansion will be the longest in history if it keeps going through the middle of next year. Despite the nonsense spewed by some renowned economists before the Great Recession, we were reminded that expansions do not go on forever.

The business cycle is clearly not dead, and this expansion is likely to end in the near future.

US Economic Expansion thru May 2018

GDP and the Role of Women in the San Antonio Economy

My colleague, Belinda Román and I, have been working on a study of a more accurate measure of the role of women in the San Antonio economy. The results were released this past Wednesday at the San Antonio Hispanic Chamber’s Women’s Award Luncheon. The presentation can be found here.

This is the first study done under our new Women in the Economy Research Program at the SABÉR Institute. There is still much to be researched in this area, but we began by calculating what the gross domestic product of the San Antonio metropolitan economy would be if the non-market household production activities were counted in GDP and if women received equal pay to men.

Household production includes, in part, activities like child care, yard work, preparing meals, house cleaning, maintenance and repairs of the house, and travel time related to such activities.

As of 2016, GDP in San Antonio was $109.3 billion, and with these adjustments, GDP would be about $149.1 billion. We are still working to complete the full report, but it will be released in July.

Steve

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Forecast of the San Antonio Economy as Presented to the GFOAT

I gave a speech today to the San Antonio chapter of the Government Finance Officers Association of Texas on the San Antonio economy. I will pull out specific charts and talk about them in detail over the next couple of weeks, but here is the entire speech for now. In short, the economy looks strong and should continue to be strong for the next year or so, but I think the probability of another recession starting within the next couple of years is pretty high.

Steve

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The Joy and Benefits of Writing

Most of my writing is in the form of academic papers or reports for consulting projects. I am always amazed at how hard writing actually is. It seems so easy on the face of it…just sit down and start tapping on the keyboard. It takes a remarkable amount of energy and effort, but it can bring much joy and benefits.

One huge benefit is that it makes you think. I have found that there is nothing that makes you think harder about a subject than writing about it. When I am writing about my research, the process quickly highlights any potential shortcomings in the research process or outcomes.

It can also bring great joy to the writer. Of course, if one enjoys writing, the process it self can be fun, but writing something that you think is quite good, maybe even to your surprise, can be such a high. It is a severe rush of pleasure – a “writer’s rush,” if you will.

I had this experience yesterday afternoon as I was completing a report. It was the end of the day, and I had no sleep the night before, which does not make for good writing circumstances for me. Moreover, I had come to the point of writing the conclusion section of the report. This has always been the least favorite section of any paper for me to write. This is probably due to the fact that it typically leads to long outs of writer’s block and ultimately, very uninspiring writing. As I finally dove into writing the conclusion yesterday, inspiration came out of nowhere, and when I got done writing it, I read over it and thought, “Wow, that is pretty good.”

What a rush and a great way to end the work day!

Steve

 

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Credit Cycle Starting to Worsen

I have been saying for the past few months that I think we are likely to have a recession within the next couple of years. One reason for this is that it seems the credit cycle is starting to reverse itself, especially as it relates to consumer credit.

The following four graphs pulled from the Federal Reserve Economic Database give some indication of this. As shown in Charts 1-3, delinquency rates for other consumer loans, credit card loans, and consumer loans declined pretty steadily since the economic recovery began, but since 2015, the delinquency rates have started to rise.

Furthermore, the increase in delinquencies seems to pick up pace in 2016 for all of the categories of loans with consumer loans and credit card loans maintaining the increase through 2017. Delinquencies in automobile loans have also been rising (see here).

On the positive side, delinquency rates on single-family mortgages appear to continue to decline (see Chart 4). This might just indicate that consumers are clearly financially stressed, but they are continuing to pay their mortgages on time in an attempt to at least keep their homes. If the economy does go into recession, we will see delinquency rates rise on mortgages, as well.

Consumers under financial stress are not likely to maintain their strong spending patterns, and since consumer spending is two-thirds of gross domestic product, a slowdown in consumer spending is not going to bode well for continued economic growth.

On the commercial side, the credit market seems to be fairly strong as delinquency rates are continuing to fall. It is just a matter of time, though, before this trend reverses course, too. If consumer spending starts to decline, this means goods and services will go unsold, eventually causing businesses to decrease production as inventories increase and demand for services falls. With less revenues flowing into the business, we will likely see delinquency rates start to rise. A recession cannot be far away at this point.

Chart 1. Delinquency Rate on Other Consumer Loans, All Commercial Banks (Seasonally Adjusted – gray bars indicate recessions)

Delinqunecy Rate on Other Consumer Loans All Commercial Banks

Chart 2. Delinquency Rate on Credit Card Loans, All Commercial Banks (Seasonally Adjusted – gray bars indicate recessions)

Delinquency Rate on Credit Card Loans All Commercial Banks

Chart 3. Delinquency Rate on Consumer Loans, All Commercial Banks (Seasonally Adjusted – gray bars indicate recessions)

Delinquency Rate on Consumer Loans All Commercial Banks

Chart 4. Delinquency Rate on Single-Family Residential Mortgages, All Commercial Banks (Seasonally Adjusted – gray bars indicate recessions)

Delinquency Rate on SF Mortgages All Commercial Banks

Maybe this is all just a regression to the historical mean, but I think these trends are a bit concerning and worth watching.

Steve

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