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The Biggest Flaw in Economic Analysis

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There's a huge difference between improving economic data and improving mood/sentiment about our economic circumstances.

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MINYANVILLE ORIGINAL It's that time of year again: the holiday shopping season. And this year, much like the past several, you should expect to see and hear a lot of shouting about one simple question: Is the country any closer to getting back on track (whatever that means)? It has been five years since the start of the recession and three years since that recession ended, after all.

Or has it ended at all? By any standard econometric measure, it has. But by some others, it hasn't. Let me give you some examples of what I mean.

First, consider Greece. This post by LOL GREECE on poverty is an example of what I am talking about. The popular metric, poverty, is actually a rather complicated one. Meanwhile, other measures like the ability to heat your home or feed your family/household are whistled past. But as Manos pointed out, "'poverty' is a word that makes headlines while 'material deprivation' is hard to translate and sounds rather technical."

And with the current unemployment rate in Greece above 25% along with a rising suicide rate, the troika's devotion to the debt-to-GDP metric takes on something more than just bureaucrats wanting to tick off a check box or manage to a metric. It's almost cult-like zealotry in punishing the country to pay its debt back. Forget about cutting off your nose to spite your face. This is cutting off your nose, removing your cheek bones, and removing your eye sockets as well.

My point in drawing on this example from Greece is that economics is, first and foremost, a social science. If you're not focusing your analysis of markets, prices, and policies on people, you're doing it completely and horribly wrong. It has been three years since Greece suffered its first sovereign downgrade which foreshadowed the situation we find ourselves in. Maybe it's time the troika stopped focusing on saving Greek bondholders and started focusing on saving Greece, the actual country.

But we even have our own examples of this kind of thinking here in the US. Consider the irony behind Black Friday, for starters:



But beyond the pictures of unrepentant, ungrateful shoppers willing to push their own grandmothers into oncoming traffic to get a bargain buster deal on a 60" TV, only to turn around and complain about it 30 minutes later, this is a country that really wrings its hands over retail sales data. Because while we all know that consumer spending makes up about 70% of the economy, we never stopped to ask ourselves if that was the kind of economy we wanted to build for ourselves. But since that's the data point du jour, let's look at retail sales.



Retail sales and the holidays go hand in hand. After all, the day after Thanksgiving is called "Black Friday." Take a look at this chart I put together from the US Census Bureau's non-seasonally adjusted retail sales data:


Click to enlarge

What I wanted to do here was look at how much each month's retail sales contributed to an annual retail sales amount. You can see that December is by far the most important month of the year for retailers, which makes sense as the holiday shopping season is in full swing. November is the second biggest month but still trails December by at least a full percentage point in terms of contribution to annual sales.

But like the Greek situation with debt-to-GDP, the question that goes unanswered is what is going on in the background while so many people cling to the print on this number. Stores are opening on Thanksgiving night with talk of strikes at retail outlets, while people repeat the exact same mistakes that brought about the credit crisis in the first place. And in this election year we simply traded in non-stop political ads a few months ago for non-stop shopping ads. There's a huge difference between improving economic data and improving mood/sentiment about our economic circumstances. And what many folks don't recognize is that in the world we find ourselves in, the chasm between haves and have-nots is widening.

Another data point you hear a lot of chatter about is the improving housing market. And one of the most often-cited statistics about that improvement is housing starts. The theory is simple: Companies won't build what people don't want to buy. That may be true in general, but I would offer up this chart as a counterpoint:



This chart takes single-family starts and multi-family starts (five units or more) and converts them into percentages of each month's reported starts number. What I didn't annotate is that in bull markets, when mood is positive, single family starts dominate. And at turning points, we can actually see rotation between single and multifamily housing development.

From where I sit, the biggest driver in the rise of housing starts these past few years has been the increase in multifamily starts. This makes sense as a "me, here, now" response since renters can leave an apartment a lot easier and faster than a homeowner can leave behind a house. And as people make the shift towards local communities with higher density as a more economical way to live and to shun the excesses of suburban living (big square footage, long commutes, relative isolation), that sets in motion a number of other trends for years to come that will not follow moods and attitudes of the past. Whether we feel good or bad about that remains to be seen.

But at the end of the day, our attitude shapes everything. And our attitudes aren't shaped by charts and graphs, they are reflected in them. But until economists stop acting like the opposite happens, we're bound to see more of the same ideas and policies that we already know won't work.

Twitter: @japhychron
No positions in stocks mentioned.
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