"Kee Points" with Jim Kee, Ph.D.

Markets are apparently pretty relieved that the first round of French voting yesterday went as expected. Marine Le Pen and Emmanuel Macron will be the two runoff candidates in the May 7th French presidential election vote. Macron is considered the centrist candidate intent on keeping France in the European Union, while Le Pen is considered the far right candidate desiring, among other things, to organize a referendum on France’s European Union membership, to exit the euro currency union and restore a national currency, and to pull out of various trade agreements. Macron is expected to win the face-off in May.


China: Most economists and analysts are skeptical regarding Chinese data, and with good reason: Chinese GDP numbers for a given quarter are released with very little delay, which makes it hard to believe that they are properly collected and tabulated. But most independent studies suggest that the official data are actually not too far off. In fact, the National Bureau of Economic Research (NBER) recently issued a working paper, “China’s GDP Growth May be Understated,” that uses satellite data to make this point.


In a fascinating approach to forecasting, the authors look at nighttime light intensity across Chinese provinces over time, and find that statistically it provides a good proxy for economic growth. They use regression analysis to estimate the relationship between light intensity and the components of the Li Keqiang index. That index, named after former Premier Li Keqiang and based upon a discussion in 2007, assesses the Chinese economy by averaging the growth rates of three variables, (1) electricity production (2) rail freight, and (3) bank loans. A lot of things can affect analysis like this, including changes in lighting technology that affect brightness, as well as weather patterns. But the overall conclusion is that the components need to be weighted differently, with bank loan growth given six to eight times more weight than rail freight, with electricity production weighted somewhere in between (Federal Reserve Bank  New York). The authors conclude that:


“Looking back at the prediction for the end of 2015, we can reject the dire growth-collapse scenarios that were suggested by some of the Wall Street indices at the time, with it being very unlikely that the true growth rate of China was much below 6 percent. In fact, our estimate for Chinese growth shows an appreciable acceleration in 2016, even as the official growth rate remained virtually unchanged.”


This continues an interesting trend of economists borrowing techniques from weather forecasters. For example, economists talk a lot about how economic downturns are caused by economic shocks, which are difficult to forecast. As I have mentioned in prior Kee Points, this has led economists to use “nowcasting” models borrowed from meteorology that use newly released data to forecasting economic activity over very short periods (i.e. “now”). By the way, the Atlanta fed’s nowcasting model (“GDPNow) is forecasting 0.5% GDP growth for the first quarter of 2017, while the New York fed’s “Nowcast” stands at 2.7%. That’s a huge difference(!). I tend to favor the Atlanta fed’s model, but the preliminary results from the Bureau of Economic Analysis will be released this Friday (April 28th) so we’ll see.


US politics: Congress will have to pass an extension of the current spending bill or pass a new one by this Friday in order to avoid a partial government shutdown. The odds of a shutdown are pretty low, since Republicans control both houses of Congress (Senate and the House of Representatives) and the White House. There have been 18 US government shutdowns over the past 40 years, with the shortest being one day and the longest (1996) being 21 days. The average performance of the market during these shutdowns was -0.6%, although it gained 3.1% during the most recent 16-day 2013 shutdown.


One of the things the current administration is working on is tax reform. Tax cuts are stimulative, but it makes a big difference as to whether or not the tax cuts are perceived to be temporary or permanent, and that in-turn depends upon how they are scored in the budget process. If tax reform is perceived to be revenue neutral (overall revenues to the government unchanged), then a 51-vote majority in the Senate is all that’s required to make the changes permanent. If, on the other hand, the bill results in an increase in deficits over the next decade, then the changes would expire after nine years (WSJ). That’s one reason why finding revenue savings in the Affordable Care Act is so important to the President (why he keeps going back to it).