FROM HUFFPOST | MAY 25, 2011
Each month, the Federal Reserve releases its latest minutes of its last meeting along with its projections of economic activity (www.federalreserve.gov). The minutes just released indicate that its prior forecasts have been tweaked a bit, with update projections for unemployment over the next two years, GDP growth, and inflation. As new data become available, the hundreds of economists at the Fed revise and recalculate numbers, which means that any forecast rarely lasts more than a few months.
And yet, the Fed’s forecasts - along with the World Bank, the International Monetary Fund, the Office of Management and Budget, the Congressional Budget Office and various others - are used to frame every single meaningful discussion about the economy. They become the fodder for media reports, for budgetary decisions made by companies, and for individuals who digest the sound-bites - “Fed predicts unemployment will level off at 9% next year” - that shapes their sentiment. Investors also turn to these signposts as markers to navigate a complex world.
Yet the fact that numbers can and are so frequently revised - and often dramatically - should be a claxon, warning us that these may be useful snapshots but cannot be relied on as accurate predictions for more than a few months out. Who was predicting today’s economy a year ago? Who was predicting the economy of 2001 in the heady days of stock bubbles in early 2000? None of those groups. This isn’t about the failure of economists per se; it’s about the inherent unknowableness of complicated systems.
Our economic data is only one stream in a vortex of global capital flows and other countries’ statistics. We barely understand how various factors interact in our own local economies, how for instance sentiment affects spending (does it?) or just how many people are actually overextended on their credit cards (we say it’s a lot, but then again, 92% or more are current on their payments). We have no way of processing and analyzing how the layers of the global economy interact, though don’t tell that to a macroeconomist. There are theories, for sure, but reality hasn’t been playing nice with theories of late.
Some have already noted the incredible gap between our hunger for certainty and predictability in an otherwise unpredictable world, from Josh Cooper Ramo in his latest book The Age of the Unthinkable to the now-ubiquitous I-told-you-so mantra of Nicholas Nassim Taleb and his black swans (http://www.fooledbyrandomness.com). Yet the overwhelming majority of people and institutions aren’t ready to abandon the illusion of predictability. That includes government budget offices and investors advisors, CFOs of major companies, and individual households trying to gauge college costs years down the line. Most cleave to admittedly faulty models and sketchy data because the alternative - no models and sketchy data - seems worse. And face it, most of us prefer being wrong in groups than wrong all alone. Even if our predictions and data are flawed, if everyone else is relying on it, then most of us go with the herd.
For now, the consensus about the future, based on predictions that have never been right in the past, is for anemic economic activity through the fall and then fairly decent into next year with still high unemployment. That of course may be correct, but then again, it almost never has been before. Better to be nimble and humble, and not pretend foresight we don’t have, then guesstimate about a future that is increasingly hard to gauge. There are things we can know - but that’s for another entry.