Michael P. Niemira is a vice president and senior economist for Bank of Tokyo-Mitsubishi in New York, and previously worked as an
for PaineWebber, Chemical Bank and Merrill Lynch.
He has taught a class on economic forecasting at NYU's Stern Graduate School of Business and on interpreting economic statistics at the New York Institute of Finance.
Trading the Fundamentals
, revised edition, McGraw-Hill, 1998
Forecasting Financial and Economic Cycles
, John Wiley & Sons, 1994
The economic backdrop of investing
coaster is no fun for the consumer.
The 'Katona effect' is named for the late founder of the University of Michigan's Survey Research Center, George Katona, and is a
hypothesis which holds internationally among industrialized
. It describes a relationship between consumer spending growth and the volatility in the overall price level. As price volatility in the economy
less and save more, and vice versa.
The Katona effect is a clear window on when consumer's spend - which is particularly important since the strength of consumer spending affects the bond market prices and the valuation of retail sector stocks.
'Technology has mastered the inventory cycle' - wrong!
Curiously, it is widely felt that high-tech supply chain management has provided greater control over the aggregate inventory cycle. Maybe someday, but the reality is far from that now. On the contrary, U.S. inventories are increasingly more volatile relative to final sales. This raises an important question on the taming of the business and industry cycles: are shorter cycles emanating from demand spurts likely to be amplified by inventory management and in
increase economic volatility? Probably so.
Don't believe everything central bankers, economists or
say or write.
probably has greater acceptance when applied to economists, investors should be just as critical in evaluating all pronouncements and articles in the financial press. Too often a good story is better than a factual one.
Ask for the proof!
Case in point - the stock-market wealth effect: the
support is not strong, nor is the survey-based evidence. George Katona summarized the basic challenge to the logic for that seemingly popular view. Katona explained that as household financial wealth grew, economists turned their attention to how the increase in wealth affected consumption and savings (simple enough). Economists interchanged 'wealth' for 'income' in standard consumption analysis, since 'in principle, consumer expenditures may be paid either out of income or from liquid assets.' But the problem with that view, Katona pointed out, is that it is in essence built on a faulty logic that 'money burns holes in people's pockets' and 'incentives to save were supposed to weaken with an increase in wealth'.
Rumors of the death of the business cycle are greatly exaggerated.
In 1897, Mark Twain said it best: "
of my death are greatly exaggerated." So too is it with the business cycle. Just when the popular sentiment - led by a handful of unseasoned economists - questions the existence of the business cycle, one shows up to correct the misperception.
Although the business cycle is extremely important to investment decisions, the 'growth cycle' is far more important to watch. Growth cycles can be measured as deviation from trend growth or as cycles in growth rates - both have a stronger statistical relationship with the stock market. Growth cycles precede the so-called classical business cycle, which provide yet another reason to watch them.