Economics IQ Answers

Last week we presented a small true/false quiz with a number of economics statements.  Some of the statements are true, but possibly misleading.  The quiz is repeated below with answers following each question.

The Quiz

1. Home prices are now deflating at a 32% annual rate, versus 8% six months ago.  [True, but misleading.  You get this result by taking the rate for a single month and multiplying by 12.  Taking two specific points like this is often misleading.  Why not the rate last month? Or a year ago?
2. Inflation, as measured by the CPI, shows housing costs to be increasing according to the "imputed rent" formula. [True.  Despite the decline in housing prices, the impact of housing on the CPI is +2.6% year over year for about 24% of the consumer basket.]
3. Planned corporate layoffs rose 68% in April to a total of over 90,000. [True]
4. As long as the largest asset on household — and bank — balance
   sheets continues to deflate, the credit and consumption hits will keep
   coming.  [Marginally true, but aggressively stated.  See #10]
5. The US economy created about 2.5 million new non-farm payroll jobs last month.  [True, but potentially misleading unless one understands that about 2.5 million jobs are also lost each month.  The point is to show the dynamic nature of employment changes.
6. The TED spread is now at 86 bp's, down from 204 in mid-March. [True]
7. The Baltic Dry Freight Index has plummeted, showing global economic weakness. [False.  It is back to the former highs.]
8. The Fed has devoted about half of its balance sheet to "unusual" liquidity efforts. [True, although many believe that the "balance sheet" approach does not reflect a real limitation on Fed power.]
9. The BLS Birth/Death adjustment has reduced past predictive
   performance, as measured by actual state employment counts when the
   data became available (months later). [False.  The Birth/Death adjustment has improved results throughout its history.]
10. Household liquid assets at $21.9 T and net worth at $31 T are about
    1% below the all-time records as of the most recent published data. [True.]

The best scores among those who submitted answers had eight correct answers.  We realize that some may disagree with the interpretation on a couple of the questions, but each raises a point of some interest.