The ABCs of forecasting the economy

Do you think all the economic info coming from Washington is true?
— Clifton D. San Angelo, Texas

As the old saying goes, “There are lies, damn lies — and statistics.”

“Truth” is a tough objective when it comes to measuring the economy, for several reasons.

First, it takes a long time to collect enough data to create a meaningful picture of what’s going on. That’s because “the economy” is really a collection of every job won or lost, every sale or purchase by every consumer, business, government agency, non-profit group, school, hospital, church, etc., the proceeds of every investment bought or sold, the manufacture of every new house, car, bedroom set, big screen TV and on and on.

That’s why pretty much every meaningful piece of economic data is a guess. In some cases, these are very good guesses — based on sound survey samples and solid statistical techniques. In other cases, the data are almost always “noisy.” If you put them all together, they sometimes — but not always — point in the same direction. That’s why economists come up with such different conclusions when they read the same set of numbers.

The other big reason economic “truth” is elusive is that much of the analysis is based a very incomplete understanding of human behavior and psychology — which can shift as rapidly as the data is collected. As oil prices have risen for the past several years, for example, it was widely assumed that energy consumers would change their behavior accordingly. Few predicted that consumers would tough it out this long before trading in their SUVs for higher-mileage cars. The latest round of layoffs in Detroit are a response to that shift; some suggest that automakers were “caught by surprise” as the market for light trucks collapsed.

Even at this stage, it’s not entirely clear where energy prices are headed: that uncertainty spills over into decisions about car purchases, how far from work we live, how far to tighten our budgets, whether to take a summer vacation, etc. So the only real “truth” is: No one knows.

Some readers insist that the “inaccuracy” of government economic data is deliberate, that the numbers are being manipulated to adhere to a political agenda or to portray the incumbent administration in a better light. There are certainly shortcomings in the way the data are collected and analyzed: Private economists sometimes take issue with the way their counterparts in government assemble the official numbers. (Various methods of “seasonal adjustments,” for example, are one of the most common sources of debate.)

But the idea that some political appointee is reviewing and editing these reports before they’re published is, in our opinion, not very credible. For one thing, these data are very closely scrutinized and compared with private, independent surveys and data sources. If you tried to cook the books, your conspiracy would have to include an awful lot of people both inside and outside the government.

More to the point, if someone is spinning the data, they should be fired. The latest numbers are hardly painting a picture of the kind of economy you’d like to see in an election year.

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