Monday, May 19, 2008

A problem with economic forecasting

The debate, or uncertainty, about the country's economic prospects is seemingly anchored by those with a highly negative outlook. Led by some journalists at major publications, a bunch of financial newsletter types, several economists with a generally leftward slant, and a few of the professional investors whose portfolios have taken big hits, this negative view portrays the U.S. at the beginning of a dust bowl, shantytown Depression. At the moment most economic data does not give any indication that this dire case is likely, or even close to being a probable scenario.



Despite that, the most negative view has, and I hate to use this word, don't know if I ever have written it, "traction". There are two reasons for this that I see, out of the innumerable choices out there.


First, an unsustainable consumer credit expansion is coming to an end. A large swath of the American public that was viewed as part of the middle class is now being pinched severely as the attainability of what was implied by that label appears to be falling out of reach. The ability to acquire one's goals was encouraged by all, from marketers to banks to car companies and even just neighborhood peer pressure, aided and abetted by the former more easy affordability of food and gas. This economic pressure is very very real for a segment of the public, and it is spreading and broadly undermining optimism. Political campaigns, notably Hillary's, that are fear and resentment based add to the pessimism. When the negative pundits speak, they have receptive listeners. That the aggregate economic numbers do not yet add up to disaster, and in fact may be the basis for a slow reopening of the financial system and the sustainability of historically positive employment numbers, does not resonate. That's understandable to some extent, as those numbers don't help a stretched budget, sell newspapers, create reputations or even attract votes.


The second reason is focused on pundits and market spokesmen in general, and why few seem to be willing to step out and accentuate the positive, or even just the mildly positive or, heck, just the neutral muddling along point of view. Simply, if one is wrong on the pessimistic side of an economic or market issue he or she is viewed a hard edged realist whose timing is off while to be wrong on the optimistic side risks being viewed as a naive fool. Why that is so I'll leave to the psychologists and social scientists, but it is true. One personal example---in the early '90's I regularly attended a large investor conference in California that, as part of the festivities, held a contest that required everyone to predict the Dow Jones Industrial Average one year later, at the time of the next conference. Several hundred portfolio managers and research analysts from across the country voted as well as a few corporate flacks like myself. From 1992 to 1996, five years, yours truly came in with the best guess three times and second once, winning wonderful magnums of Napa Valley's finest. How could that have happened given that 70 to 80% of those participating were clearly more experienced and better networked. It was simply that I actually was optimistic and covered the high end of what was the probable range of guesses. None of those many experienced investors could take that reputational risk even though many ran long only mutual fund books. Today many of those same folks, or people with similar experience, are again loathe to step forward.

This note is not meant to suggest that these are not stressful economic times. A significant readjustment in the economy on many fronts is underway. Prosperity is segmented rather than broad based. It's welcome to the global economy for real now as market based prices for fuel, food, and intellectual capital impact the U.S. more than anytime in recent history. This could soon be exacerbated soon by a Democratic president who raises trade barriers such that Walmart's low prices every day are no longer so low. These are difficult times for many. That does not mean, however, that we are on the cusp of a 1930's type debacle. It may just mean that we are in the middle of a 1990-1991 type slowdown. Focusing on reasonable and well thought out long term solutions to the economic problems that do exist and looking for ways to help bridge the gap for people in distress is what should be the points of discussion. Forecasting and, for some, reveling in the most negative scenario is not helpful, annoys me to no end, and could eventually lead to bad policy that actually extends the downturn.

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