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The difficulty with economic forecasting
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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.
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