What’s in store for the U.S. economy in 2015? Change. Good change or bad change? Both … but mostly good.
Will economic forecasts be of any help in navigating through the coming year? Are economic forecasts worth anything at all? Yes, but more for their words than their numbers.
Economic forecasts are influenced by a lot of factors, as well as analytical skills and human nature. Most of all, though, they are influenced by history.
The wisest words I can remember about the difference between reading about history and living through it were spoken in a family discussion about World War II. There was much talk about grand strategies, leaders, battles, and even economics. And one of the young people, looking toward his grandmother, offered the idea that it must have been exciting to live in those times.
She nodded and acknowledged that it was … then added, “The difference for us was that we didn’t know how it would turn out.”
When we look at the past, especially the distant past, things seem to fall into place. Because the driving forces are now more visible, outcomes seem almost preordained. Events that had been a puzzle of uncertainty, doubt, and anxiety have now acquired a more dignified, orderly progress.
The apparent order gives us a sense of confidence that we know what caused things. It is often difficult, in fact, to remember what all our anxiety about them was all about. We know how things turned out.
Confidence is a good thing but economic forecasting still isn’t easy. We do get a boost, though from our belief that we know what is going on in the economy and by ignoring our past forecasting failures. We are just now starting the first quarter of 2015, for example, and it’s hard for us to remember the mess our economy was in just a year ago in first quarter 2014. Our Gross Domestic Product (GDP) dropped 2.4 percent that quarter, and corporate profits shrank 10 percent, spawning worries about a second recession.
The people least likely to remember that negative quarter would be the economists who had failed to forecast it. Economic forecasters, like weather forecasters, have an acquired survival instinct that gives them lightning-fast forgetting of their mistakes and allows them to press on with their work.
In the service of accuracy, economic forecasters must attempt to balance natural optimism against the net sum of the positive and negative forces they may see at work within the economy.
Ironically, the people who are the best equipped to forecast our economic future are precluded from doing so. Government officials in the Treasury, Commerce, and Labor departments have the best access to timely, key economic information.
The Federal Reserve chairman, for example, commands buildings full of data and skilled analysts and is in a position to know more about our financial markets and government finance than any other individual in the country. It would be considered irresponsible, though, for the chairman to come out with a forecast that says the economy is going to tank, even just shrink a little, because that would scare people and have a negative effect on their decisions.
What we end up with, then, are tofu forecasts that are very bland; positive but not exuberant, not too rosy — and not too useful, either. Consensus forecasts, which are a composite of private economists’ predictions, are a little better, because their responsibilities do not constrain their outlook as much as those of those of public officials, but still not very useful.
The most valuable material in the best economic forecasts, though, is not in the predicted GDP growth but in identifying the sources of change, both positive and negative. The job market, for example, is expected to be much improved in 2015, but also roiled by shifts in overall supply — including formerly illegal immigrants —as well as possible layoffs in the energy sector. Many economists are also expecting that the improved jobs picture will draw out those who had previously left the workforce. This will increase the supply of labor and make it difficult to reduce the unemployment rate further.
The decline in oil prices should give a healthy boost to consumer spending. There is some concern about a “tech bubble” due to overvalued startups, but it isn’t clear that its bursting would alter the momentum of the overall economy.
The major forces driving our economy in 2015 are mostly positive, and barring an international crisis over oil prices our economic picture should continue to improve. And if we skip the tofu and search out the story behind the numbers, there is a lot of valuable information in economic forecasts for investors and for all of us.
James McCusker is a Bothell economist, educator and consultant. He also writes a column for the monthly Herald Business Journal.
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