Spurious Data

Three things that could change the US outlook for the better. A dispatch from the NABE Annual Meeting

I had the great pleasure to co-chair the 2012 National Association of Business Economics Annual Meeting committee this year. The meeting was 3 days of presentations from top economists from industry, finance, government and academia. Luminaries included Shelia Bair, Bob Shilller, Glenn Hubbard, Roger Ferguson, Jagdish Bhagwati, Torsten Slok, Manuel Balmaseda, George Soros, Perry Mehrling and Ed Glaeser to name a few.

With so many diverse speakers from around the world there was much to learn and plenty of networking to be done.  Nevertheless three main themes emerged from the conference and they suggest that the dismal science may in fact be seeing some bright spots on the horizon.

1. The US and North American Energy picture is a significant game changer for the US economy and geopolitics.  Big changes to the economic landscape such as new oil and gas discoveries take time to be   factored in by historical econometric models like ARIMA models or even the famed RSQE model from the University of Michigan and thus the burgeoning oil and gas industry in the US and North America represents a rather welcome upside surprise to our growth model.

2. Big Data is BIG. It is changing efficiency in energy, industry, and even medicine and health care delivery.

3. The so-called Fiscal Cliff is in fact the Fiscal Bunny Slope.  The political experts that attended the conference as well as the economic advisors to the candidates, Glenn Hubbard and Gene Sperling all believed that a compromise would be reached that would avoid the cliff.

If you are wondering where the dismal is, you will find it mostly in Europe where the situation continues to evolve at an excruciatingly slow pace. There were several presentations on housing, 6 to be exact and none of them forecast a spectacular rebound. Though as we know, where you stand depends greatly on where you sit. If you sit at the bottom of the trough on housing, a small increase from a low base can have a meaningful impact on GDP, a meaningful impact on jobs growth and a meaningful impact on multiplier industries such as home improvement and furniture makers.

North American Oil and Gas

Delving further into the oil and gas picture, John Larson from IHS global insight suggested that the energy sector could add 1.1% to GDP in 2013. If we take average economist forecasts of 2.2% GDP growth and assume that most are not considering including meaningful energy growth this has the potential for a significant upside surprise. When factored in, US GDP growth in 2013 could be as high as 3.3%.

Larson’s other assertions were just as bold and also quite positive for the US economy.

  • By 2020, 2mn additional jobs will have been added via direct, indirect & induced employment from the burgeoning energy industry
  • The industry will add $200bn to GDP by 2015
  • The government will gather $1.5tn in taxes over 15 years with approximately 50% going to the Federal government and the remainder going to local governments.

Edward Morse, global head of Citi’s Oil and Gas team, posited that North America, and the US in particular had some distinct advantages in its oil and gas resources. First, the returns to landowners align incentives of those who wish to drill and exploit the resources with those who own the rights to the resources. In most other countries (Saudi Arabia, Brazil, Venezuela, Indonesia etc.) the resources are all inefficiently exploited and all owned by the State. Secondly, in both the US and Canada, there exist independent risk taking companies that are small and nimble. Small companies can make decisions that large companies such as Exxon or Chevron would take years to make. Thirdly, drillers in North America do not depend on budgets imposed from above, but on private capital markets. These companies can quickly raise money and have the capital to take risks on drilling activities.

The implications of North America’s energy outlook were not only US focused. Mexico had found new oil and gas sources after years of decline at its Cantarell Field. Canada is continuing to grow its proven reserves, pipelines and discoveries.  All this adds up to important Geo-Political as well as economic impacts. Geo-Politically, it means that countries in the Middle East and South America will no longer export to the US.  Their Geo-Political pole will shift to China and Asia. Although, it is certainly possible the US could begin to export more energy to China across the Pacific.  Based on current projections it is feasible that the US could erase its current account deficit by 2022, and thus the dollar would strengthen much more than most economists currently expect over the coming decade.

Big Data

The three words to describe big data are Volume, Velocity and Variety.  The internet is just the beginning of big data’s applications. Scientific and mathematical computations that were both time consuming and prone to error can now be computed in seconds and analyzed in a similarly rapid fashion. Specifically computing ability can now rapidly analyze complex items such as DNA, and sub atomic processes.  We can engage quantum game theory. On an industrial basis we can have intelligent devices, intelligent collaboration and intelligent automation. The implications for growth are enormous and are only beginning to be quantified.

Big Data and the Applications of the Industrial Internet

As Peter Evans from GE pointed out, Economist Robert Solow was famous for noting in 1987 that one could see the computer age everywhere but in the productivity statistics. A lot has changed in 25 years and we wonder what Mr. Solow would say now. We are beginning to see the intelligent collaboration between machines (B2B) as well as between humans and machines as displayed graphically in figure 2 above.  When one considers that there are over 130,000 power plants in the world producing 5200 GW of power annually, there is a lot of headroom for optimization. GE has identified a 1% improvement, or $66bn over a 15 yr period, from efficiency gains derived from Big Data to Gas Turbines.  There are over 4000 hospitals in the US, imagine the headroom for productivity!  The marriage of Big Data and nano technology has given way to graphine strips that can sense one’s physiology and communicate with doctors and hospitals to optimize drug delivery and overall patient care.  Big Data is a topic that has endless applications and we will be writing about it more and more over the coming years.
The Fiscal Bunny Slope
Much ado about nothing.  Well, not exactly. All told the measures include the implications of the expiration of the bush tax cuts, the automatic stabilizers put in place when Congress could not agree on measures to avert a debt ceiling hike, the end of the payroll tax credit and the end of extended unemployment benefits as well as the new taxes on real estate to support the Affordable Care Act. Were all of the spending cuts and tax hikes to take place the CBO estimates that the $600bn savings in deficit reduction would be wiped out by the economic impact that would ultimately have a negative feedback loop on economic performance that would increase the deficit by $500bn.

The good news is that the automatic stabilizers will most likely not be employed and the Bush tax cuts are likely to remain in place for those earning under $250,000.  All in then the spending cuts will likely amount to approximately $140bn. The most important of the cuts are best outlined in bullet point form below.

  • The 3.5% tax on residential real estate transactions will remain, but it kicks in at gains over $250,000 for single people and gains over $500,000 for married couples. This is actually one of the most benign taxes when one considers that the average home sells for$230,000 so gains over $250,000 or $500,000 are not applicable for the majority of the population.  The CBO estimates this will be between $15-$18bn.
  • The 2% cut in the payroll tax (otherwise known as the tax that goes to Social Security) amounts to $95bn in total but the average working person will have $890 less in their pocket spread out over 12 months. So the spending impact while not insignificant could well be offset by other improvements in the economy as outlined above.
  • The end of extended unemployment benefits will reduce outlays by $26bn in fiscal 2013 and for those unemployed persons without extended the benefits the impact will be significant. However, from a macro point of view, this is a small amount subtracted from the overall economy.

In conclusion, the gains from energy will likely offset the Fiscal Bunny Slope. This is good news indeed. In our estimation GDP could well grow at a 2.8-3.1% rate in 2013. The impact of a gradually improving housing market (albeit from a very low base) and the productivity gains seen in Big Data, the future of the US economy is not as bleak as we expected in the early part of 2012. There are still plenty of risks in Europe, which has no easy solutions and a long road ahead. China, though not likely to see a hard landing is likely to see its potential GDP decline as its population ages and its total factor productivity declines. We will write more on these topics in the coming weeks. But if you are looking for the major takeaways from the NABE Annual Meeting, the news is not nearly as bleak as I might have guessed when I began working with my NABE colleagues to plan the event around this time last year.

6 Responses to “Three things that could change the US outlook for the better. A dispatch from the NABE Annual Meeting”

fornelsOctober 25th, 2012 at 1:09 am

This sounds too good to be true. We are in a major productive dislocation this is the underlying reason for slow economic growth. If the U.S. economy were growing at the predicted rate above very soon we would experience excesses in outpout and would be ready for the next new recession.

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