Thursday, September 27, 2012

Atlanta Fed: "How Big Is the Output Gap?..."

I know the neo-Keynesians are all up in that as the young  people say (in a slightly different context) but I've recently started thinking that the number is pretty much meaningless.
From the Federal reserve bank of Atlanta's Macroblog:
Opinions vary widely about how much slack there is in the economy these days. Some say a lot—some say not so much.

Last month, we reached out to members of our Business Inflation Expectations (BIE) panel for their take on the issue. The panel indicated they had more pricing power in August than they did last October. OK, that doesn't exactly gauge the amount of slack businesses think they have, but it does suggest that, however much slack there is, it's been shrinking.

Another detail revealed by our August inquiry was that retailers think they have more pricing power compared with manufacturers—a pretty good sign the latter is experiencing more slack than the former.
In this month's BIE survey we went fishing in the same murky waters, but this time we took a more direct approach. We asked our panel to provide a percentage estimate of how far their sales levels are above/below "normal." Here's what we found: On a gross domestic product (GDP)–weighted basis, the panel estimates that current sales are about 7.5 percent below normal. That's more slack than the conventional estimates, like the Congressional Budget Office's (CBO) measure of the GDP gap, which puts the economy about 6 percent under its potential.

But perhaps a more interesting observation from our September survey is how widely current performance varies by sector and size within our panel. Retailers, for example, say their current sales are a little less than 2 percent below normal. And firms in the leisure/hospitality and the transportation/warehousing sectors—sectors where growth has been particularly robust in recent years—say they are operating at, or just a shade above, normal levels.

Compare these estimates with those from durable goods manufacturers, which report that their current sales levels are nearly 12 percent below normal, and finance and insurance companies, which say they are almost 17 percent below normal. And construction firms? Well, best not even ask them....MORE
If by "normal" the respondents are referring to the 2005-2007 bubble days I should hope things are down.
An economy built on 125% LTV mortgages, San Francisco realtors knocking down $600K or any of the other effects of the loose-as-a-goose lending and monetary policies of that long-gone era is, simply put, delusional.

If capacity utilization rates use capacity designed to feed the bubble you have an imaginary number as your denominator.
Besides not being sustainable, economic fantasy can be downright dangerous.