James Hamilton in his blog is talking about the possibility of recession in the next year, 2006-2007. Fairly technical.

The main point is that statistical models are pointless in predicting the future (even the next year). When it comes to the reality, all economic models have failed us till now. All models are wrong but some are useful. Macroeconomic models are useless.

One salient point, I think and also commented by one reader, is that the cause and effects in economic policies are inevitably intertwined. Fed makes policies to modify the downward or upward econ trend based on previous econ condition. It is a dynamic process with too much outside interference. Simply modeling one series of data is naive because it ignores all external factors. However, one may argue that the data themselves tell the whole story, in that they lump everything into one series of data points.

Paul Krugman also made a good point in today’s New York Time about the paradox of American family discontent feelings and good national statistics.

What I think is that the calculation of the employment rate may make some artificial effects: it incurs both denominator and numerator. If the numerator gets big, the rate will go up, but if the denominator gets small, the rate will also go up. Lots of people are now out of labor force, which decreases the denominator.

Another weakness in employment rate is that it doesn’t say anything about the average wages. Now people are apparently working for lower payment than before. On the other hand, the costs of living, ranging from grocery and gasoline to house mortgage and rent, are increasing faster than the GDP, or something closer to our lives, our salary. The consumer price index(CPI) increases 2.3% while the GDP increases merely 1.5%. There is a huge discrepancy here.

Another interesting indicator is that you can see cities everywhere are bragging about their abilities to retain or attract several hundred jobs–most are low payment jobs. Apparently they are more people than jobs. In California, 11,000 people applied for 400 jobs in Walmart, even though Walmart is notoriously mean in payment and employee benefits.