What happens to Personal Consumption Expenditures when banks tighten up mortgage lending standards? With the release of April PCE data, we can now check out a dubious, but widely publicized prediction.
Two months ago the influential Doug Kass repeatedly published a chart that purported to show a near perfect correlation between lending standards as measured in a quarterly Fed survey and year-over-year PCE. The chart was also posted and discussed at the widely read Calculated Risk blog site.
In a three-part series on "A Dash", we went to the original data sources and performed our own analysis.
Part One. We showed readers that the correlation was exaggerated, that the scale had been manipulated in a deceptive fashion, and that the causation argument did not fit the data. The existing correlation was probably spurious, the change in each resulting from changes in prevailing economic conditions.
Part Two. We explained the difference between a confidence interval and a correlation, helping readers to understand the difference between substantive significance and statistical significance.
Part Three. We compared the chart to various optical illusions, showing why accurate measurement is better than the eye.
The Prediction and the Result
The original Kass chart showed an ominous tightening in lending standards, suggesting that we were on the verge of a similarly precipitous decline in personal consumption.
As one can see from the updated chart, (the new segment indicated by a red line around it) the PCE change was modestly lower. The rate of PCE growth continues well within the range from the last two years.
The Kass prediction was incorrect.
As we concluded in our original analysis:
The current mortgage market is much different from that of 1990. Nearly everyone -- especially Doug Kass -- believes that recent standards have become quite loose. Some tightening is a logical reaction. There is nothing in the data he presents that shows that this should result in a decline in consumer spending.
Such a decline might occur, of course. There may be other reasons to link housing and the economy. That is beyond the scope of Doug Kass's argument and this response. The point here is that the data in the original Kass chart do not support his conclusion.
The next Fed survey of bank officers should be reported any day, so there will be a new data point to add to the chart.