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.
- 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?
- 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.]
- Planned corporate layoffs rose 68% in April to a total of over 90,000. [True]
- 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]
- 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.
- The TED spread is now at 86 bp's, down from 204 in mid-March. [True]
- The Baltic Dry Freight Index has plummeted, showing global economic weakness. [False. It is back to the former highs.]
- 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.]
- 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.]
- 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.