The difficulty with economic forecasting
The UCLA Anderson Forecast is predicting a gloomy economic future. Edward Leamer, the forecast's director, talks with Kai Ryssdal about why it's hard to forecast the economy without historical data to compare.
A closed store. (Oli Scarff/Getty Images)
More on America's Financial Crisis
Links
TEXT OF INTERVIEW
Kai Ryssdal: The economic flavor of this Wednesday was set early. With a pair of reports that got Wall Street all excited and launched another round of speculation that some kind of corner has been turned. Orders for durable goods rose last month. That's expensive stuff like refrigerators and computers. New home sales were up, too, month over month. The obligatory caveat here is that one step forward 10 steps back does not an economic recovery make. And increasingly, economists whose job it is to make sense of the data have been reduced to guessing. Edward Leamer is the director of the UCLA Anderson economic forecast. Good to have you with us.
EDWARD LEAMER: Thank you very much. Great to be here.
Ryssdal: There is some conflicting data out there. There is what looked like good numbers today. The stock market has been reacting mostly positively the last week or two. What do you make of it?
LEAMER: I think what you're talking about is that there are a few little rays of sunshine in an otherwise dark side of data. The sunshine comes from building permits are up a little bit, housing starts a little bit, retail sales look like they've bottomed out. And today, as you said, factory orders are up. And most importantly, the equities markets are starting to see a little optimism going forward. At the same time, the economy is extremely troubled. The labor market is suffering jobs at a very rapid rate. We expect that to continue at least through the next quarter. The second half of this year still looks better.
Ryssdal: The nub of it, though, is that you really don't have a lot to base your current forecasting on, do you?
LEAMER: No, that's accurate. Meaning that accurate forecasting comes from comparing the data that are available today with historical points in the past, and there is hardly any legitimate comparisons. And the result is that nobody is doing forecasting; we're all doing hunches at this point.
Ryssdal: What is the average consumer supposed to make of this, then?
LEAMER: We've frightened consumers to the point where they imagine there is a good prospect of a Great Depression. That certainly is not in the prospect. No reputable forecaster is producing anything like a Great Depression. So it's still OK if you spend a little bit. You do not have to put all your money into a mattress.
Ryssdal: Is it possible that one of things economists can't really figure out is what consumers are going to do with all this conflicting information?
LEAMER: Well, that's a critical point, which is that we unleashed this tsunami of fear in September, October and November. Fear from the standpoint of equity investors, but more importantly, consumers. And truthfully, it's very hard to predict a fear cycle. That fear can grip us very rapidly, but it can lose its grip just as rapidly.
Ryssdal: How might we know that it's losing its grip?
LEAMER: Well, you gotta see consumers making the only forecast that matters, which is out there buying homes and cars again. Because when they're buying homes and cars, they're feeling good about the future.
Ryssdal: Since I have you on the line, let me try to put on the spot, even though you've just said most economists are playing hunches these days. What is your hunch about the way things are going to go?
LEAMER: Well, our hunch is that we're going to have a very negative quarter, GDP wise, this quarter, and we'll have another distressingly large negative in the second quarter. But then the second half of next year the economy will be in a healing cycle. You won't get signigicant growth, but you won't get the levels of negatives that we've had this first half.
Ryssdal: The second half of next year, you said?
LEAMER: No, 2009. I meant this year, 2009.
Ryssdal: Edward Leamer the director of the UCLA Anderson Forecast. Mr. Leamer, thanks so much for your time.
LEAMER: Thank you.
Comments
Comment | Refresh
From Sacramento, CA, 04/26/2009
The interviewee states that no reputable forecaster would speculate that the current economic situation may be considered a depression or evolve into one. I think that it is clear that his psychology assumes optimism, that somehow we will plug through this one and come out on top, better than before. People generally have difficulty recognizing bad times, or admitting fault or their anxieties. Leamer is holding to his crutch of market capitalism and hopeful that we pull out of this one. Beware, any human that tells you it is silly to think of the dark side is themselves assuming only one side and anxious of death and dark.
I do not personally know whether a depression is likely, however all the indications seem to be pointing in this direction. So, instead of directing people to spend, perhaps we should talk about the inadequacies of government and the attrocious behavior of the banks and bankers. Blame someone who has more power in resolving this situation.
03/26/2009
Its been so long since my science classes...what's the name for the impact observers make, upon that which they are trying to observe?
do we have forecasters here, admitting that if they forecast a depression, that people will respond accordingly, and create one?
From winston-salem, NC, 03/25/2009
OK Pat. Get out your dictionary; "data" is a plural.
From Houston, TX, 03/25/2009
I tend to dismiss as lightweight, pedantic, self-important and insignificant any forecaster that uses the word "data" as a plural. It simplifies evaluating forecasters.
Post a Comment: Please be civil, brief and relevant.
Email addresses are never displayed, but they are required to confirm your comments. All comments are moderated. Marketplace reserves the right to edit any comments on this site and to read them on the air if they are extra-interesting. Please read the Comment Guidelines before posting.
You must be 13 or over to submit information to American Public Media. The information entered into this form will not be used to send unsolicited email and will not be sold to a third party. For more information see Terms and Conditions and Privacy Policy.