"Kee" Points with Jim Kee, PhD.

This Friday we will get the advance estimate for 3rd quarter GDP growth, and consensus estimates seem to be converging around the 2.5%-3% range. Nowcasting models are a little lower, with the Atlanta fed at 2% and the New York fed’s model at 2.2%. Either way it is an improvement over the first few quarters, but not much. If the fed raises rates by year end it won’t be because of excessive growth or inflation concerns. Probabilities calculated from futures markets (Chicago Mercantile Exchange) suggest that the odds of a rate hike by year’s end are a little bit better than a coin toss, or around 63%. As an aside, one of my strong dislikes in this business occurs when people make statements regarding probabilities that are not calculated from market-based data like futures data. Take, for example, the statement “We see a 20% probability of recession next year.” That is not a falsifiable statement, meaning that it cannot be proven wrong regardless of the outcome. That is, it is not wrong if we don’t get a recession and it is not wrong if we do get a recession. I know falsifiability is a pretty tough standard to impose on a world characterized by uncertainty, but it is a great way to evaluate various commentaries. The next time you hear a provocative forecast or prediction, just ask yourself, “Is that statement falsifiable? Is it stated in a way that the turn of events can prove it right or wrong?”


Looking broadly over the world, the last few weeks have actually yielded some positive economic data from around the world. Third quarter GDP from China came in at 6.7%. That’s the third quarter of 6.7% growth in a row for China(!), which suggests that it is a somewhat “managed” number. However, recent research published by the Federal Reserve indicates that models which use more objective data to estimate Chinese GDP growth tend to match the official numbers pretty well. This corroborates other research on the same topic that I talked about in Kee Points several years ago that also found that official numbers squared pretty well with private sector estimates. In any event, I continue to think that the current Chinese numbers reflect temporary stimulus efforts, and that 2017 should be more challenging for China. European data too is coming in a bit better than expected in light of Brexit (and other things, like debt, refugees, etc.). Here again, I think the biggest impact of these developments will take time to show up in the data. The UK in particular has enjoyed a temporary stimulus from the weaker pound, which stimulates sales to foreigners in the short-term. Currency depreciation effects, however, tend to produce temporary stimulus rather than permanent improvements in a country’s long-term growth path. Data from Japan is also picking up a bit (manufacturing) or coming in less negative than expected (exports). The Bank of Japan’s emphasis on targeting zero percent 10-year rates and positive inflation at least takes away any guesswork as to whether the Japanese central bank will remain accommodative (it will). In the US, corporate earnings for the third quarter are also coming in ahead of expectations for both sales (topline) and profits (bottom line), with about a quarter of S&P 500 companies reporting so far. And finally, remarks from Saudi Arabia’s oil minister, Khalid al-Falih, in London suggest more stabilization in oil prices ahead relative to what we’ve seen over the past few years.


Is cash going away? That’s a question that the Federal Reserve Bank of San Francisco addressed recently. Their results surprised me, as economists have been talking about a “cashless society” for at least four decades. In their blog, “Cash Myths Busted,” the bank has a fun and provocative online quiz. Among the results are:  (1) The fact that the demand for currency is actually growing. (2) The average consumer uses cash for about two-thirds of purchases under $10. (3) More than 90 percent of purchases are made in person, not online.  (4) Transportation services (taxis, buses, etc.) make up a small 2.2 % of cash spending, so ride-sharing apps thus far have had little impact on the use of cash. 5) Contrary to popular belief, millennials use mostly cash to pay back a debt or give a monetary gift.


Since we are now two weeks out until the election, I thought that I would provide you with a quick update from Pollyvote. Currently, Pollyvote has 54% odds of Hillary Clinton winning and 46% odds of Donald Trump winning.