Friday, July 16, 2004

Economic Forecasting: Down is Up?

Not quite yet probably, but things aren't looking pretty.

Forecasters long have expected the economy to slow from the red-hot 6 percent growth rate of last year’s second half. After all the nation’s consumers, who account for 70 percent of economic activity, are no longer benefiting from the double-espresso shot of a federal tax cut and mortgage refinancing wave.

Still, the latest evidence of slowing growth has been a bit startling, especially in consumer spending.

Auto sales went into a ditch in June, with makers of cars and light trucks reporting the worst monthly sales pace in six years. Some analysts said rising gasoline prices were to blame, discouraging would-be buyers from test-driving that shiny new gas guzzler. Others said an experimental effort by automakers to reduce rebates and other incentives backfired.

Efraim Levy, who follows the industry for Standard & Poor’s, said automakers already have boosted incentives again in their unending quest to maintain market share. But the June downturn raises the question of whether consumer demand for vehicles has at last been satiated by nearly three years of zero-interest loans and attractive rebate offers.

“That is the billion-dollar question,” Levy said.

“People are not buying vehicles at this point because they need vehicles,” said Morningstar analyst Phil Guziec. “They are buying them because they feel good, and the incentives make the price right.”

But even excluding autos, retail sales unexpectedly dropped 0.2 percent in June, marking the second time this year that the core retail sales figure has turned negative. That pattern is virtually unprecedented during a Fed tightening cycle, said Merrill Lynch chief North American economist David Rosenberg.

A research note from ISI Group, an influential institutional brokerage, suggested that consumer spending remained sluggish in the first half of July, putting further pressure on retail stocks, CNBC reported.

“The economics community may view this as a blip, but you really have to go back almost two decades to find the last time this happened in the context of an expanding economy,” Rosenberg said in a research note.

When the mainstream economic journalists start questioning why economists are so rosy despite contrary data, then you really know you've got a perception gap! When the journalists start asking how things can be so good when the numbers are so bad, I think the beginning of the denoument is near. Of course this leaves the question of why so many economists got it wrong, but that's a matter for another post truly but I'll try to give a snap answer. One could also ask why those spending years learning intelligence analysis can get their conclusions so wrong. The short answer is that years spend learning the theories, models, and techniques required in order to qualify for their field's specialized requirements generally leave them with a deficit of experience with the "real world". This is especially true in the latter stage of an academic paradigm expansion.

There is such a thing as "personal experience" and without it all the book-learning in the world goes to waste. Without education, you're going to be limited to your own experience and that's not good but without experience education rarely makes sense. It's a balance between the two that produces insight and applicability.

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