Tool Time

JACKSON HOLE, Wyo. -- And today we sing.

I feel it in my fingers

I feel it in my toes.

Slowing is all around me

And so the feeling grows.

It's written on the wind

It's everywhere I go.

So if you really love me

Come on and let it show.

Yep. Members of the slowdown camp have done

Reg Presley

wrong. They've replaced "Love" with "Slowing" and bastardized one cool ditty. And your narrator don't take kindly to that.

Three days ago one of the biggest tools in the profession --

The Tool

hereafter -- jumped on a

drop in

housing starts

and a below-average

increase in

industrial production

to proclaim that economic growth is slowing.

The Tool has been doing this for one year solid.

April 1998. The Tool warns of slower job growth. (Job growth then proves strong enough to drive the unemployment rate to 4.2% from 4.7% over the next year.)

May 1998. The Tool cites a drop in housing starts as evidence that restrictive monetary policy is slowing overall growth. (Housing starts then go on to scream to their highest level since 1986. Gross domestic product ends up posting a 1998 increase bigger than anything seen since 1984.) Tool also warns that the odds of a recession hitting in 1998 have risen to 40%. (Fill in your own wise-ass remark here.)

June 1998. The Tool warns that inventory growth made the first-quarter GDP figure look artificially strong and that the number actually points to slower growth. (GDP ends up posting a 1998 increase bigger than anything seen since 1984.)

July 1998. The Tool claims that his repeated forecasts of a slowdown in economic growth are bearing out, and that the rest of the world is finally catching on. (This part is true. An economic-paper trail produced by Bilbo Baggins and a bunch of his Middle Earth buddies prove it, as do phone calls to three independent economic forecasters in Narnia.) Tool also warns that service-sector jobs are likely to show much smaller gains in the months ahead. (They end up posting a massive 287k increase one month later and go on to average a whopping 234k during the second half of the year.) Tool also stresses the risk of a negative second-quarter GDP print and claims that the slowdown has indeed arrived. (Second-quarter growth comes in at 1.8%. GDP ends up posting a 1998 increase bigger than anything seen since 1984.)

August 1998. The Tool expresses disbelief that some economists continue to "drone on" about a wealth effect and emphasizes serious deflation risks. (You take this one. Please. Take it.) Tool also dismisses a massive 287k July service-sector job gain by claiming that employment is a lagging indicator and warns that the rest of the July jobs report points to slower growth ahead. (Service-sector job growth ends up proving even stronger during the second half of the year than it did during the first. The unemployment rate ends up falling another two-tenths over the final six months of 1998.)

There exist scores more similar comments that run from September 1998 through last Friday. Trust me.

Two points here.

The first is that economic growth at large will not slow materially until consumption growth does (keep in mind that consumption accounts for roughly 68% of GDP). And consumption growth is not slowing materially. Matter of fact, consumption growth is not slowing at all.

Retail sales were growing at an 11.2% year-on-year rate as of March (March is the latest month for which retail sales numbers are available). They were growing at a 7.1% rate three months before that; they were growing at a 4.4% rate six months before that; and they were growing at a 2.1% rate a year ago.

Data to be released May 3 will confirm that personal consumption expenditure (PCE) was growing at a 6.3% year-on-year rate as of the first quarter. (Keep in mind that the retail sales series, because it does not include spending for services, typically captures less than half of all consumption during any given month.) PCE was growing at a 6.1% rate one quarter before that; it was growing at a 5.5% rate two quarters before that; and it was growing at a 5.1% rate a year ago.

So not only is consumption growth not slowing materially, it isn't slowing at all. Matter of fact, it's not even flat. Consumption growth is accelerating; consumption is growing at an increasing rate.

The second point concerns the fact that The Tool happens to be the biggest New Era Fan around. Matter of fact, many slowdown types also happen to be big New Era Fans.

But being both just does not make sense. The Tool and those like him --

Tool Juniors

hereafter -- just don't have their own $^!%& straight.

Tool and Tool Juniors claim that real (inflation-adjusted) interest rates have been overly restrictive for more than year.

If real rates are so damn restrictive, then why are sales of goods in interest-sensitive sectors like autos and housing setting records? And why is GDP growth soaring?

Tool and Tool Juniors claim that a material and permanent increase in productivity means that the economy can grow faster than it ever has before.

So why have they grossly underestimated growth in each of the last three years?

And why have they continued to predict slowdowns?

And why are they surprised when growth comes in even bigger than their own productivity argument predicts?

And why, when growth comes in even bigger than their own productivity argument predicts, do they label growth unsustainable and attribute it to special factors like the weather?

You have two choices. You can listen to The Tool and Tool Juniors explain recent strong growth like this:

Recent strength appears to have been distorted on the high side by numerous factors. First, mild winter weather boosted economic activity in retail and construction sectors. Second, booming tax refunds and a surge in mortgage refinancing helped boost consumption. Third, Y2K spending (by businesses and consumers) boosted spending for computers, food, and hardware.

Or you can listen to sane forecasters like the ones at

Salomon Smith Barney

explain it like this:

The strength, for the most part, is not a function of large tax refunds or mild weather -- such arguments pop up every year -- but stems from the fundamental support of financial conditions.

Look. The Tool and Tool Juniors cannot even come close to accurately forecasting growth, and forecasting growth is exponentially easier than predicting the price measures or proving what productivity's doing.

So why should anyone value anything they have to say about anything?

Side Dish

Is it just me? Or is it wonderfully ... quiet ... around here today?

Best board game?