The incoming data continues to support my baseline forecast of moderate and potentially accelerating growth for the United States. Note that I am not considering European contagion in my analysis because it is so far beyond my expertise.

I am considering the possibility of a EuroZone recession resulting from too tight monetary policy and the spillover effects seem to be small to me.

Again, however, if you are concerned about US banks going under or a powerful run to the dollar in the wake of European banking crisis then you should be listening to people who have deeper European knowledge.

In the absence of all that the numbers seem to be progressing as I expected. Multi-family starts are rising. Builder confidence is increasing. New Claims for Unemployment insurance are falling. Consumer lending is loosening. Chain-store sales are strong.

I have never really thought consumer confidence mattered for anything, and so far I have been safe in that assumption. Could bite me in the coming months, but for now this is my perspective and I am sticking to it.

One area that did give me pause was the BLS inflation report.

While some people took – false – comfort in waning inflation the internals did not look good to me.

I saw falling used cars prices. Maybe that is ok as the supply of new cars is expanding but I am still watching it closely.

Shockingly, though I saw both staling rents and falling lodging prices. This I don’t understand. Of course one month does not make a trend but I though I was seeing very strong pressure on these sectors.

Vacancy rates for both hotels and apartments are moving quite low. Obviously there is very little supply on the horizon for at least 18 months. What I expect to see is rising prices.

This is a positive sign for me because it indicates that more projects will be able to get the green light. The important thing to remember about structures is that while future demand projections matter you really need to be making enough money to cover your financing costs as soon as possible. Otherwise your are in a massive liquidity spiral.

So, to get more starts we simply have to have either cheaper money (and that can’t get much cheaper) or lower vacancies, higher rents and higher lodging rates.

Thus I think that economists should view declining rents the same way the view declining wages – as a net negative for economic well being, not a positive.

This makes sense from a philosophical perspective as well since both land and labor are the ultimate scarce factors of production and so should accrue all surplus from an expanding economy. If that didn’t make sense don’t worry, the point is that rising rents means more construction and construction is in an unsustainable depression that needs to be alleviated.

NGDP Targeting

Now on NGDP targeting. I think we are all buying into the idea that it is better and easier to sell an NGDP target than calls for higher inflation. Even writing out the mock statement, it sounds like something it would be hard for the average Financial Times reading citizen to object to. Here again is my mock statement:

The Committee judges that economic conditions will warrant exceptionally low levels for the Federal Funds rate until current value Gross Domestic Product exceeds $19.5 Trillion.

However – and this may be the traditionalist in me – I don’t think we are even in the same ballpark, the same universe, of adopting naked NGDP targeting as the Fed’s policy or even more out there, creating a market for NGDP futures.

What we do is we change the statement to reflect an NGDP perspective. What that then requires is a relationship between the NGDP path, our current NGDP and the proper interest rate response of the Fed.

This is what I mean by an NGDP “Taylor rule.” I think a rough version should be easy enough to estimate based on past behavior. My strategy is to first take the period from 1990 to 2007 as being optimal in terms of NGDP and then just back-out the implicit interest rate response function.

FRED Graph

After that we can think about welfare measure.


Based on Cowen’s Law, I am sure work has been done on this before, so if anyone has links let me know.

However, I would love for this to be an example of where the blogosphere collectively worked on an emerging problem and came up with a series workable solutions not using the traditional platform of working papers, conferences, and seminars.

The blogosphere has the potential to be faster, more transparent, more open to outside participants and directly understandable by journalists and involved citizens. This, in my mind, is the way academics ought to be doing business.