Friday, April 10, 2009

Why Journalists Should Take Calculus

It is hard to be an economics correspondent these days. On the one hand, you see the economy getting worse every day. Record foreclosures, record unemployment, rising bankruptcies, desperation in the minutes from the Federal Reserve from 3 weeks ago. You even see things you thought were not possible in this rich(?) country of ours, like an open squatters movement. Yet, the stock market keeps going up which makes you think the economy will recover in six months. After all, we all know that the market anticipates the recovery by six months. Furthermore, we also know that it is all a matter of psychology. If we believe things will get better, people will spend and things will get better. Where they are going to get the money? you don't really know. "Experts" say this is how it works and you are a journalist, not an economist.

So, following your English Composition 201 method, you go on a quest for some evidence that you can use in your article. First you talk to a few economists. You find a few optimists who tell you that things are getting better because the rate of deterioration is slowing down. Sounds good enough. Then you pick up an article from a colleague in the NYT that says the following (my comments are in [], the emphasis is also mine):

Exports, which make up about one-third of China's economy[they are close to 40%], were 17.1 percent lower in March than they were in the same month a year earlier, the government said Friday. This marked a fifth consecutive month of declines since the world economy ground to a crawl last year, sending demand for goods from China and other exporting countries sharply lower.

Imports to China fell 25.1 percent from a year ago, a slide that was steeper than that seen in February and than economists had projected.

But the fall in exports was below what economists had projected, and less severe than the 25.7 percent plunge recorded the previous month.

The slowing pace of decline in exports was the latest in a string of recent statistics that, combined, have led a growing number of economists to believe that the Chinese economy may have put the worst behind it
In summary, exports, which are extremely important to the Chinese economy, continue to drop at a high rate. However, economists missed their prediction of an even higher rate, so they feel good. In addition, since the speed of the fall is lower, they expect a change in direction. Why? because once it stops falling it will either go up or stay the same. When? they are economists, not soothsayers, however, if their predictions turn to be wrong on the pessimistic side, they will feel good and tell us about it.

The pace of decline is also as the second derivative of, in this case, the export numbers. In Physics, it represents the acceleration. In terms of your car, it is after all the same concept, the acceleration is the rate at which you are speeding or slowing down. It says nothing about the direction and, while it is true that in order for China's exports to grow they must stop declining, it is NOT true that declining at a slower rate means that they will start growing again. In other words, the exports may fall at 25% (faster), 17% (same), or 5%(an even slower rate) next month and then either fall, recover, or stay the same the following month. The real news would be if the grew which is NOT what is going on.

If you like analogies, imagine someone is beating you over the head with a baseball bat at a rate of 3 hits per minute. For some reason, this person decides to just hit you just once every minute (a slower pace). I suppose that we could find an economist to say that you are better off, but the fact remains that your headache will not go away until the beating stops. Whether your attacker is taking a breather or permanently slowing down makes a huge difference, but we just do not have enough information to know.

China has been exporting to the world at a ridiculous pace for years. Now, global consumption is slowing and some is unlikely to come back (think about consumption driven by home equity loans). Thus, I think it is logical that Chinese exports should not return to their 2006-2008 levels which means that they should keep contracting for the foreseeable future. At what pace? I don't know. I also could be wrong, but trying to extrapolate a recovery from a reduction in the pace of deterioration is misleading at best.

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