Is it really the role of the media to try and prop up consumer and business confidence? And why single out Turnbull? Our very own PM has repeatedly referred to the global scale of the difficulties to attempt to insulate the government from any domestic fall-out.

Again, from the SMH: “The Prime Minister, Kevin Rudd, said it was to “strengthen the Australian economy in the face of the worst global financial crisis since the Great Depression”.

I know that it is not considered polite in these parts to say anything in support of Turnbull, but there are a number of examples where he has been quite prescient over the past few months – early warnings about the impact of the financial crisis on Australia, the need to raise guarantees on deposits, the dangers of offering blanket guarantees to just one segment of the market. I could go on.

You have to admit that it is a tricky time to be an opposition leader. Finding a balance between staying relevent and not appearing to be carping too much is difficult. Access to the best advice is limited, as are resources. Even the tories are finding there once large lead in the polls diminish, despite the fact that it was Brown that presided over the mess that the UK finds itself in!

“But the central bank has been increasingly worried that the destruction of household wealth from sliding share prices could cause a much more serve pullback in spending.

Businesses looked like revising back ambitious investment plans, partly due to a tightening in credit, and a significant moderation in the labour market was also underway, Mr Edey said.

He noted that the domestic indicators available to date covered the period only up to September, limiting their value in assessing the impact of the latest round of financial turmoil.

“It’s important to recognise that the extraordinary financial events of the past two months have had a major bearing on economic prospects, both internationally and in Australia,” he said.”

But I still disagree with the substance of your analysis.

I’m not sure that you can describe what has happened in financial markets since the end of September as a “conniption”!!

If your point had merely been to say that before the intensification things were flatlining but it still too early to tell how much worse things will get – then that would have been fine. But I think that in rebutting the MSM you went too far in the other direction.

The key point is that most most of the commentary that you are referring to as being excessively pessimistics has taken place SINCE the intensification of the financial crisis. But the data you refer to tells us what was happening BEFORE the intensification!

On WA, again it is pointless to say that the trend estimates are pointing up when the largest falls in commodity prices occurred after the data was released! These things are not transmitted to the real economy immediately.

Unemployment is a lagging indicator, not a contemporaneous indicator and certainly not a leading indicator – you will remember that in the early 1990s the unemployment rate peaked well after the trough in the economy. Low unemployment at the beginning of a large negative shock has never prevented a shock from have dire consequences. Unemployment was pretty low in 1973!!!

The wages data is irrelevent for telling us what is happening in the real economy right now. What did you expect to see? Wages being negotiated downwards during a period in which inflation is running at its highest underlying rate since the early 1990s?

All forecasters at the moment are grappling with the difficulty of projecting the effect of a shock that they think is significant, but for which there is yet little evidence of in the real data. But you can’t point to data relevent to the period before the shock as evidence that the shock isn’t that big a deal!!

What can be said that there is a lot of uncertainty. As I said in the previous post, I’m not saying that the gloom merchants are right. And I’m not saying that your optimism is right. You can tell a story either way. But nobody should be confident right now that they know how things will evolve. The Great Depression thing is a red herring. The real question is whether Australia can avoid a recession. I certainly hope so but I am far from certain.

Here is another question. The Australian household saving rate has declined significantly over the past two decades. That has been related to a number of factors – one of which is the rapid growth in asset prices and therefore household net worth. Given the rapid change in the outlook for household net worth in recent months, do you think it is reasonable to expect households to undertake some balance sheet repair and signicantly increase their saving out of current income? What do you think the macro effects of that will be? Do you believe that the fiscal and monetary stimulus will be enough to offset it?

It is not unreasonable to argue that all the stimulus that is around at the moment might ward off recession. However, the fact that governments around the world are feeling the need to inject so much into their economies should tell you something about how worried they are.

As I also said in the earlier post – there are many reasons to think that Australia is in a good starting position to weather the crisis. I certainly didn’t argue that in the pre-Lehman collapse period Australia was in a worse position than the US, Japan and Europe. But why was that? It was because at that point the countries that have been most important to propelling commodity prices and thus Australian growth had been looking quite resilient.

Since then, the outlook in Asia has deteriorated significantly. Yes, they will still grow solidly – but if you think of things in terms of output gaps rather than raw growth rates, signfiicant negative output gaps are likely to emerge. Why do you think the Chinese government announced such a large fiscal package?

My point is that it is perfectly reasonable to be a bear in the current circumstances. Your usual criticisms of the MSM on interpretation of polling data is spot-on. But here I think you have gone too far.

The point of your blog, I thought, was to offer a more balanced perspective than the MSM and in particular to be less polemical. That is not how this post reads.

It may have been on the Crikey site, but a tongue in cheek comment was “the ASX has fallen from over 6000 to 3500 – treading water my arse” or words to that effect.

For the benefit of those recently initiated into the stock market, anyone who expects to more than double their investment over ten years, is not being realistic. I’ve noted below some research I’ve found as well as the results of my own research and some thoughts on the situation in general.

“What We Can Learn From 1,600 Years Of Historical Investment Returns Thursday, December 19, 2002
By Dr. Steve Sjuggerud

I recently studied 100 years of investing returns. But I didn’t just look at the U.S. I looked at 100 years of investment data for 16 different countries around the world, weighted by size. This way, my results wouldn’t be skewed by the relatively good century the U.S. had. Here’s what I found:
• STOCKS around the world brought home an annualized gain of 9.2% a year in U.S. dollars from 1900-2000, including dividends. (It’s important to mention dividends, because dividends made up almost half of your investment return in the 20th century.) The U.S. did better, returning 10.1% a year.
• GOVERNMENT BONDS around the world returned 4.4%. Again the U.S. did better, up 4.8%.
• And CASH (as measured by short-term Treasuries) returned 4.1%.

So, our historical data shows that stocks made 9.2%, bonds made 4.4%, and cash returned 4.1% in the 20th century. That includes war and peace, inflation and deflation, and bubbles and busts…a little bit of everything.”

I also did some analysis on the ASX going back to 1875, and it too produced some interesting results.

I looked at investing for ten year periods starting in 1875 through to today and found on average a ten year investment in the ASX would turn $10,000 into $18,030 (excluding any dividends paid). From 1950, on average, any ten year period would turn $10,000 into $20,490.

The worst ten year period was from 1888 which turned $10,000 into $8,680. (the 1890’s depression)

The best ten year period was from 1977 which turned $10,000 into $57,850.

What’s in store for now?

There will not be a re-run of the 1890’s or the 1930’s in the real economy and therefore the stock market. Why? Pure and simple because of world wide governments.

In the 1930’s the US Government sector was about 2-3% of the economy, whereas today it is around 30%. Governments now have an enormous influence over the economy, through spending and tax cuts. In conjunction with a large reduction in prices – the price of money (i.e. interest rates) and the price of oil, both key lubricants for the real economy; the encouragement of international trade and not imposing tariffs; and coordinated international action from a much more diversified international market than either the 1890’s or 1930’s; all will see a much faster turnaround than many commentators are predicting.

The key argument for a prolonged downturn and even a worse depression than either of the earlier two, revolves around debt levels. Yes, it’s true the levels are historically high, and as people will “de leverage” (pay off debts), they won’t be spending as much, therefore demand will reduce and economies will slow. Unemployment will rise, asset prices will fall (stocks already have and real estate will fall more), and overall things will be more difficult. But we’re at 4.5% unemployment, we’ve got a helluva long way to go before we get to the 11% levels of 1990 or 1982, and light years from the over 30% of the 1930’s. And even if it looked like we were heading over 10%, no Govt anywhere, would let that happen. They would immediately start a myriad of public works programs, to ensure that didn’t happen.

It seems to me, we are becoming more and more obsessed with always looking for the worst in situations. We’ve been terrified of several things recently, none of which have come to fruition. First, the millennium bug, then terrorism, then bird flu, then cataclysmic climate change, and now the next Great Depression. Each of the issues were/are real, and each deserved attention, but equally each received a hysterical response, not least of which from many in the media, whose behaviour in each instance was irresponsible.

Another Depression is as remote as the likelihood of another world war.

I’ll go through all your bits.

The point of this was about the real economy, in terms of the observable reality on the ground and how what we are actually seeing in the data isnt as bad as the commentary surrounding it. It’s not a piece on how everything is rosey – but on how the real economy is not behaving as poorly as it’s being made out to be. Not yet anyway, be dont really know what next months data will be, only what the currently available data says – and on that score the real economy is holding up pretty well. When unemployment data defied the misery merchants they wrote it off as reduced accuracy stemming from the reduced survey size, when the monthly September retail data was released the misery merchants wrote that off because of it’s highly volatile nature and it’s tendency to be revised. Now the quarterly data has come in (and while there was a fair spread of expectations for this, it was lower than the 0.4% growth a few expected, but a lot higher than the big contraction others were expecting) it too showed the real economy holding up pretty well, especially so once you account for NSW.

I could have used the ABS chain volume measures (and I’ve posted the charts for those above for anyone interested) but that data doesn’t tell a story fundamentally different to the sales data.I would have liked to get into the component issues by industry as well because there’s some interesting things happening in there, but that’s getting too pointy headed for the audience I was writing for and there’s a word limit to abide by, meaning it couldn’t have been explained in any depth – if at all.

On business investment and “who knows how quickly that might deteriorate?”. The answer to that is probably no one – which is the point I was getting at. The economic commentary is too often being driven by what ‘might’ happen (which allows for all sorts of doomy and gloomy scenarios) often at the expense of what is happening in terms of the observable reality we’re getting from the real economy.

I wasn’t saying that retail sales are a leading indicator (although cafe and restaurant tunover can be at times) – merely that what is happening on the ground with retail sales doesn’t justify expectations being driven into the dirt. Neither does the unemployment data, neither does the wage growth data (The Melbourne Institute had it coming in at 4% growth yesterday, suggesting that the labour market is more resilient than people are giving it credit for. It’s certainly in line with the latest employment data).

Yes, the capital and asset markets are having conniptions, but these conniptions have been coming in waves, and every wave so far has had a smaller effect on on the real economy than what was initially expected. Will the September wave have a bigger effect this time? Don’t know… nobody does. What happened in September should, ceteris paribus, flow through stronger than what happened between October 07 and August 08. But can we really say all things are equal here to begin with? We don’t know how the big elephant in the room, the rate cuts and loosening fiscal policy, will ameliorate the fallout from September.

The outlook in WA and QLD might change, it might not – it hasn’t yet. WA actually looks like it’s turned the corner in it’s trend estimates!

The real economy by any measure is treading water. That’s not weak commentary, that’s what the data is actually telling us so far. From the data we have at the moment, we aren’t sharing the experience of Europe, Japan and the US. That might change, but it also might not!

We don’t know – but not knowing is certainly not a reason to start driving the one thing that could help here – expectations – into the ground for the sake of one cheap headline after the next. Turnbull here too needs to wake up to himself on this.

I actually am an economist LO, I’m not coming to this from a position of pig ignorance.

SO if we look at the bigger picture here, we’ve had the first home buyers grant increase attempting to put a floor under house prices so households wont end up with negative equity and to avoid any wealth destruction effects from the bricks and mortar sector superimposing themselves on what’s already happening in the equity markets.

There’s the first home builders grant blowing out to 21K, the new low income housing construction spend as well as the council grants which all attempt to bolster the construction sector with it’s large flow on effects to the rest of the economy.

Interest rates are being slashed to the point where we’ve nearly got free money floating around, we’ve got the one off payments floating through the economy for Christmas with another round of that apparently to come next year – and the government still can do another 2% GDP pump prime on top over the next 12 months without any problem at all except the political one which comes with a small deficit.

Petrol prices have fallen, the labour market is still tight, wages growth is still good, retail sales are pretty good except NSW, the volume estimates are still pretty good as well considering what is happening.Yes they could be either better or worse than they look at the moment depending on what happens in the December quarter – and the December quarter has a fair bit of cash getting thrown into it via government.

The rest of the world is in a pickle, but China and India are still going strong meaning our non-mainland Asian markets (sans Japan and with South Korea being a question mark) should still hold up quite well although not brilliantly, and the IMF has just given the green light for the world to start channeling 2% of global GDP into the economy by governments.

Our dollar is declining nicely (although a bit too much at times forcing the RBA to go into the market) giving out our import competing industries a boost for the first time in a number of years. The farm sector looks pretty good at the moment, resources are coming off their highs but are still strong, our terms of trade are still good.

On the balance of probabilities – we are looking pretty good. We are looking fantastic relative to nearly all of the rest of the world.

The data that we have to describe the observable economic reality on the ground here is showing what can only be described as resilience.

I tried to past a graph of quarterly retail sales volumes in both trend and seasonally adjusted terms going back to the early 1980s but couldn’t get it to work on the comments page.

If you want to include it yourself, it suggests that in trend terms retail sales in the September quarter were similarly weak to the GST related downturn earlier in the decade and the 1992/93 period, but much stronger than the recession outcomes during 1990.

However, given that the biggest “shock” in this episode is arguably not in the data yet, at the very least there must be a risk that by this time next year the epsisode will look as bad for retail sales as the early 1990s.

The declines I refer to in the quarterly volumes are the ABS trend estimates. The comparisons I made to earlier episodes are also on a trend basis. On a seasonally adjusted basis volumes rose slightly in the September quarter after falling in the June and March quarters. Although the seasonally adjusted numbers are most relevant to the print of the quarterly national accounts that economists pay most attention to, the trend number is probably more useful for thinking about what is happening to underlying growth in retail sales. Of course, what happens in subsequent quarters will affect the current estimate of trend – so if the December quarter is particularly weak, the estimate of trend growth for September would also be revised down. It is also worth keeping in mind that retail sales estimates can be subject to significant revisions.

On the issue of state variation, you are right that NSW is noticeably weaker than the other states. Still, it is worth keeping in mind that the recent declines in commodity prices will primarily affect the mining states, while the declines in equity prices will impact all states.

Interpreting recent quarterly numbers is also complicated by the significant decline in world oil prices since July, and the tax cuts that came through in the September quarter.

Bottom line – be cautious!!

Cheers

It is nice to see you straying from psephology. And you are right to draw attention to the fact that pessimism can influence consumer and business sentiment, which in turn can influence real activity.

But overall this piece is a bit sloppy.

First, why are you drawing on the value of retail sales rather than the volume? Nationally, the volume of retail sales has fallen in each of the past two quarters. Volumes are the more relevant indicator. Do you know when the last time Australia experienced two consecutive quarters of declining retail sales volumes? December 1992 to March 1993.

Second, retail sales are not the whole economy. They are one component of consumption, which is one (albeit large) component of GDP. There are other, more cyclical components of activity such as business investment, and who knows how quickly that might deteriorate in the current environment. Yes, retail sales figures are released in a timely fashion, but that doesn’t mean that they are the best leading indicator of activity in the real economy.

Third, this data tells us largely about what happened BEFORE the financial crisis intensified in mid-September. Since then the ASX 200 has fallen from around 5000 to around 3500 – that is 30%! It is also the case that commodity prices have fallen dramatically since the end of September and house prices are likely to have fallen further in the December quarter. So, it is likely that we will see a third consecutive quarter of declines in retail sales volumes – which would be the first time since June 1990 to December 1990. Who knows how heavily indebted consumers will react in the face of such large-scale wealth destruction. How quickly do you think the outlook might change in the commodity exporting states of WA and QLD?

Fourth, while agreeing that some of the commentary is overdone, few commentators are saying that the real economy is looking anything like the Great Depression. What most in the media are saying is that this is the worst financial crisis in developed economies since the Great Depression.

As for how things evolve from here, who knows, but indicators on the real and nominal side are looking very bad all over the world. Did you see the latest payrolls report in the US? Have you seen how rapidly the consumption outlook is deteriorating in the US? Do you realise that the euro zone already in recession? Have you noticed how quickly China is slowing down?

Australia is a small open economy. In the current environment it has some advantages (lots of room for fiscal loosening, lots of room for further interest rate cuts, an exchange rate that is depreciating to offset some of the weaker international outlook, a relatively robust financial sector) – but also disadvantages (an expensive housing stock, a highly indebted housing sector, a very large current account deficit, enormous external liabilities).

I’d be careful about getting carried away with your optimism when the economic outlook is so uncertain. You can hardly get stuck into the MSM when your own commentary, on this subject, is so weak.