WASHINGTON -- The economy's slide has one familiar
feature: Few, if any, economists predicted it. We should
not be surprised. Economists routinely miss the turning
points of business cycles and, indeed, have missed most of
the major economic transformations of the past
half-century, whether for good or ill. The great boom of
the 1990s was barely anticipated. The same was true of
other upheavals: sporadic "energy crises," the sharp rise of
inflation in the 1970s, its dramatic fall in the 1980s, and
various shifts in productivity growth.
At present, most forecasts are bravado and bluff. Hardly
a day passes without the government or private industry
disgorging some economic statistic that is instantly seized
upon to demonstrate that (a) "the worst has passed" or (b)
"the economy is tanking." In the first quarter the economy
grew at a 2 percent annual rate -- better than expected. A
good omen. But in April unemployment rose to 4.5 percent --
worse than expected. A bad omen. On the other hand, stocks
have recovered from recent lows -- a good omen. The truth is
that no one knows.
Even the brightest mortals cannot peer far into the
future. As recently as last October the "consensus forecast"
of 52 economists surveyed by the Blue Chip Economic
Indicators -- a newsletter -- was for a strong 3.5 percent
growth in 2001. The "consensus" is now down to 2 percent, and
though few economists yet predict an outright recession
(usually defined as two consecutive quarters of falling
output), this clearly is a possibility.
Their picture of the future usually reflects the recent
past, because that's what they know. They underpredicted
inflation in the 1970s because it had been low in the '60s
and they expected it to stay low. They overpredicted
inflation in the 1980s because it had been high in the '70s
and they expected it to stay high. This backward vision
also explains the optimistic bias of today's forecasts.
Because the economy thrived in the late 1990s, economists
expected it to continue thriving.
Perhaps the trophy for optimism goes to Merrill Lynch's
economists. "We're sticking with our view that the U.S.
economy will avoid an outright recession," they wrote
recently. "Payrolls (payroll jobs) fell for the second
consecutive month in April, plunging by 223,000. There have
almost never been two consecutive payroll declines that
didn't mark a recession. But the Fed has never eased
(interest rates) as rapidly as it is currently doing, which
is why we still think a contraction can be avoided." We'll
As a rule, forecasters rely on computer models that try
to predict how, say, a rise in consumer spending might
affect profits, investment and employment -- and how these
changes might feed back into inflation, stock prices,
interest rates and (again) consumer spending. The idea is
that present behavior reflects past behavior, as reflected
in various economic statistics. This is not as simple as it
sounds. Statistics are incomplete, and behavior changes.
Every business cycle creates new experiences and
expectations that alter how people and businesses think and
act. What was true a year ago or a decade ago may no longer
be true. Optimism and pessimism feed on themselves. "In long
business (expansions), there will be a lot of investment --
and then overinvestment," says Victor Zarnowitz, a retired
economist from the University of Chicago. Certainly that's
the case now -- computers and telecommunications equipment
being obvious examples.
Worse, forecasting models exclude almost everything
interesting and disruptive in life: politics, nationalism,
technological change, the weather, greed, fear, ambition,
ignorance and stupidity -- to name a few omissions.
Naturally, blunders occur. To explain and excuse these
lapses, economists often blame "shocks." A "shock" is a
catchall label that covers almost anything that the model
misses and that spoils the forecast. Energy and food "shocks"
(big shifts in prices) are common varieties. "Shocks"
contradict the premise of the models, which is that
economic change is gradual and comprehensible.
Most of the time it is. This is why economists and
models seem right more often than not. Today is usually
like yesterday, which was like the day before. Inflation
won't jump from today's 3 percent to 13 percent in a few
months. Because this is true, economic forecasts cluster
together. The clustering also reflects herd behavior. To
stray too far from your peers is to risk looking foolish --
alone. There's less danger in being wrong with everyone
We call this exercise forecasting, but of course it
isn't. It's telling people what they already know or might
know by examining the available information. It creates an
illusion of understanding. The trouble is that there are
times when radical and dramatic changes do happen, and at
these moments economists are almost as clueless as everyone
else. Their crystal balls are cracked. Forecasts are least
reliable when they are most needed.