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Thursday, June 05, 2003

Do We Need a Big Hammer For the Big Wedge?

Brad makes the following extremely sensible point.

Reuters expects bad employment news this Friday, but thinks that the rest of the economic news is good--and that the discrepancy is because employment is a lagging indicator. I think that the discrepancy comes from the fact that underlying trend productivity growth is much more rapid than in any recession for the past generation--and this drives a big wedge between the demand news and the employment news.
Source: Semi Daily Journal

I think he's absolutely right, and this is the output gap argument I know and love. But to go from this to saying that for eg. "we are x points short, this should bring down inflation 0.25 per quarter, so in 6 quarters we will be at zero", this is much more difficult, this is the bit I don't like. I have no idea what the underlying 'business cycle trend' looks like right now. This we can only talk about post hoc (remember the owl minerva flys only AFTER dusk). The data is highly erratic, and much more than normal this time round. Better to watch and wait. I think the services 'bounce' needs to be confirmed with more data before reaching any conclusion. The markets are seeing the rebound, but are they just 'wishful thinking'. Time will reveal all. What is clear, is that this is no simple double dip, so argument of the 'past will be our guide' kind has to be a little suspect. So what does this tell us about the US deficit question, is arguing from recent past experience problematic here too? Finally is the drop in long term US rates following Greenspans sattelite conference good or bad news? Thoughts please.

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