The Problem With Economic Forecasts

By Jeff Harding

Professional economists are really confused by the recent data. As I have noted, what professional economists do is make a forecast by taking a statistic and run a trend line based on it. They take data from the US government (Departments of Commerce and Labor, Census, the Fed) as well as private sources and project these results into the future. If, for example, Macroeconomic Advisers, a St. Louis forecasting firm that generates monthly economic data for the forecasting community, gets its numbers on monthly GDP wrong, then the forecasting models of other economists based on these data tumble too.

The consensus of the economists surveyed by the Wall Street Journal now say Q3 will grow by 2.4%. “After months of uncertainty, economists are finally seeing a break in the clouds. Forecasts were revised upward for every period, with 27 economists saying the recession had ended and 11 seeing a trough this month or next.”

Source Wall Street Journal

Click to enlarge

Economists just aren’t very good at this forecasting stuff and they should be mostly ignored. I think weather forecasters do a much better job. If economists were forecasting the weather, they would look at the weather last week to make their prediction for next week.

They have been surprised by new data which they view as being conflicting, sending mixed signals. For example:

Macroeconomic Advisers just came out today with “corrected” data for May and new data for June. In May they said the economy grew 0.3%; now they say growth was zero. For June they say growth was –0.1. We’ll see if that data will be corrected next month when they report July numbers.

Retail sales numbers just came in and they were “disappointing” (i.e., unexpected). After gains in May and June, July came in –0.1%, and that includes the Cash for Clunkers stimulus. If you take out autos, then it would be down –0.6%. Retail sales are down -8.3% from July, 2008.

Here is another unexpected result: initial claims for jobless benefits rose to 558,000, an increase of 4,000, for the week ended Aug. 8. The four-week average of new claims, which aims to smooth volatility in the data, rose by 8,500 to 565,000.

And … “Business inventories fell 1.1% in June to a seasonally adjusted $1.35 trillion, the Commerce Department said Thursday. A 0.9% increase in business sales, to $975.8 billion in June, was the latest reminder that companies may have to begin restocking shelves soon as demand rises.” But, “total business inventories/sales ratio based on seasonally adjusted data at the end of June was 1.38. The June 2008 ratio was 1.26.”

Source Census Department

Source Census Department

The inventory ratio is important because sales are down 18.0 percent from June 2008. If retail sales stay “disappointing” or decline further, then that will dash everyone’s hopes for a V-shaped recovery because businesses won’t order new inventory, thus keeping manufacturers at a depressed level. Auto sales were responsible for a slight uptick in sales, but as I have discussed, the Cash for Clunkers program is phony growth; it can’t be sustained.

My guess is that the Q3 forecasts for GDP will go up and down as the data presents itself; if the economists are right, it will be just a coincidence.

My guess is that maybe Q3 will be better because of the phony auto sales numbers from Cash for Clunkers which will be renewed and increased. My view is that there are still long term factors that are causing a restructuring of our economy which will act to restrict future economic growth. That has to do with the huge amount of debt that burdens private citizens as well as the huge federal budget deficit.

As deleveraging of private debt continues to roll through the economy, most people will increase savings and reduce spending. Since consumer spending represents 70% of our economy that will require a realignment of the economy which will continue to be painful and will cause continued job losses in the sectors of the economy servicing the consumer. All the retail outlets, all the new retailers, and the Asian manufacturers supplying these retailers will continue to be under severe pressure. It is not going to go back to where we were pre-Crash.

Another statistic came out today that economist didn’t expect and that is the Consumer Sentiment Index produced by the University of Michigan. It decreased to 63.2 this month, the lowest since March, from 66 in July. The measure reached a three-decade low of 55.3 in November. That didn’t help the stock markets today.

It all comes back to the consumer. And they are doing the smart thing right now: hunkering down for the winter, reducing debt, saving for retirement, holding on tight to their jobs, and hoping for the best. This will quickly lead to new economic growth. But … you should worry more about the government and the Fed and their attempts to thwart a real recovery. Government attempts to impose new regulations on business, an increasing role of government in the economy, and the Fed’s attempt to reinflate the economy will only hinder real recovery, and the resulting economic damage through inflation and increased taxation will be substantial.

But if you want to have fun, watch the economists’ scorecards. Maybe we can start an office pool.


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