Forecasting the Past

Coming to the end of the month, we confront the economic forecasters' fire drill. The Wall Street houses and various pretenders make their last-minute adjustment to forecasts -- for Q2!!! 

Indeed, you say, a bit late. the end of July. Forecasting the past? of what value is that?

Naturally for the real economy there is no value, since you already made your plans, hired your people, bought your inventory, bought --or not -- the house, broke ground -- or not -- on your plant. But for credibility on Wall Street or in economics, it is the news flow that matters. The news of the week is the BEA advance release on Wednesday last. That number came in at 4.0, a great number -- unless you subtract inventory build. the revision of Q1 from -2.9 to -2.1 was also big news -- until you realize it makes the first half of the year still a meager 1.0. For Gary Shilling, who picked a zero, it is an embarrassment and will exclude him from the conversation. In spite of his being right for thirty-five years on the direction of bond yields when everybody else was wrong.

A couple of other forecasters who predicted the depth and breadth of the financial crisis have similarly suffered rebuke. Nouriel Roubini was Nostradamus for a bit. Dr. Doom accurately diagnosed the housing bust following through into financial market breakdown and deep recession. His catch phrase "tapped out, earning less, debt burdened" is still descriptive of where people live. But he made the mistake of believing financial markets would follow the real economy. His stock market prediction lost his clients lots of money. He fell back into the pack of those who never looked outside the group.

A second is Bill McBride. Under the pseudonym Calculated Risk, McBride saw the housing bubble collapse from his perch right above it in California real estate. Early last year, he called another turn, "Future's so bright I'm going to need shades." Well, it is getting dark, but not from my sunglasses.

The financial crisis and subsequent stagnation were best predicted by IDEA's Steve Keen, at least according to the poll at RWER which netted him the Revere Prize. Steve has been on the road for a decade with his contrarian message, delivering his critique of Neoclassicals and not being wrong. Can he get traction? Not really. 

John Maynard Keynes once said, "It is better to be approximately right than precisely wrong." He was talking about utility value. The mainstream forecaster has been precise, and wrong. The current recovery is a kind of self-fulling prophecy, not because it came true. Many -- including the present author -- see no recovery where it counts. It is a self-fulfilling prophecy because people have been predicting it for so long it seems like it must have happened. And of course, those who predicted recovery are glad to imagine one.

Readers should be aware, the opinions of professional economic forecasters is not a leading indicator. It is noise. Here is the survey of forecasters released by the Philadelphia Fed August 1, 2008, nine months into the recession:

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They've taken away the bar charts at the Philadelphia Fed, but tabular data is presented. Here, from the report released in February 2014, the middle of Q1, a quarter that came in at -2.1 percent growth:

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Just the hoopla and anticipation around the end of the month is a symptom of not knowing what's going on. Once we were told that monetary policy acts with a lag, now we are told it is "data-driven." That means we have to wait for the data. We have no idea what's happening and we have to see what already happened. Fed forecasts have been as unreliable as those of the OECD and the IMF. If you make your plans for Shanghai on those plans, you'll find yourself in Albuquerque.

The real economy is bouncing along the bottom. The financial markets are buoyant and the fortunes of the wealthy buoy with them, but there is no residential housing recovery, there is no significant private investment growth, the government is in austerity mode. Where is the business cycle? Can you really have a business cycle without investment from somebody --  households, business, or government? Five years of zero interest rates. Total private debt is not down. Corporate debt is up, household debt is down marginally.

And people are suffering. Maybe we should start listening to the guy who was right, and remains right.