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

  • The Current Economy and Markets
  • The Most Interesting Thing I Saw Last Week


The Current Economy and Markets

Growth is slowing a bit, with Nowcasting models like the Atlanta Federal Reserve Bank’s GDPNow (my favorite) model putting fourth quarter GDP growth at 2.5%. That will change with updated data as we move through the quarter, but it is less than the 3.5% growth rate estimated for the third quarter, and certainly below the second quarter’s 4.2% growth rate. I don’t attribute this to any “wearing off” of the business tax cuts (reduced corporate rates, favorable expensing provisions) or reduced impacts of a less regulatory tone at the federal level (or Fed rate hikes, for that matter). I see it primarily due to the impacts of trade uncertainty on business spending. Global market movements (US over Non-US, Emerging Markets down most) also seem to reflect this. But this expansion is pretty anomalous, so it is important to watch the data closely (and we do). For example, prior expansions have been driven or led by housing and autos. We’ve seen a normal, strong rebound in autos since the recession (and not the transient cash-for-clunkers blip), but housing starts are still way below prior expansion levels. And we’ve never had a series of rate hikes that followed seven years of (near) zero percent rates, so that territory (i.e. the impact of rate hikes on the economy and markets) is a little uncharted. As for markets, we’ll see if we get a strong year-end bounce, which is typical of mid-term election years (called a “Santa Claus rally” in non-election years). That’s the average pattern, but of course there’s too much variability of any given year’s market performance around the average to trade on it. If only investing were that easy!

The Most Interesting Thing I Saw Last Week

In prior Kee Points I have talked about the difficulties of measuring GDP in economies with a large non-market (i.e. government) component. That is because GDP is meant to measure “market valued” output, and it is hard to measure how much government production, which is not subject to profit and loss, is market valued. One Nobel Prize winner, Frederick von Hayek, called it the “economic problem.” Hayek described it not as a problem of how best to build a bridge, which is an engineering problem; the economic problem was whether or not to build a bridge at all given competing uses for the resources. Would society instead value an aspirin factory? Or a toy factory? How would you know? The economic problem solves itself in decentralized, price-directed market economies, but Hayek felt that centrally planned economies would be lost in “a sea of conceivable alternatives.” They would always produce too much of some things and not enough of others, and indeed centrally planned economies have been characterized by such persistent shortages of things people desire and surpluses of items not demanded. But that’s old Cold War stuff! Does it apply today? Well, a recent Financial Times article, “China’s under-used regional data centres stir overcapacity fears,” details how the Chinese government has subsidized firms (including Apple) to build data storage in remote areas (following the latest five year plan no less), resulting in a “plethora of under-used sites,” while demand outstrips supply by 20 to 25 percent in cities like Beijing and Shanghai. In the aggregate, “there’s definitely over capacity” (China Policy Research) as China continues on what some have called a “bubble in big data” there (Financial Times). Such general overcapacity interspersed with localized shortages is just Hayek’s economic problem rearing its 70 year-old head.