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The Unknowables

The dismal science reaches new depths as economists realize that there's ever more they don't know.

12:00 AM, Oct 9, 2003 • By IRWIN M. STELZER
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WE HAVE ALWAYS KNOWN that the views of economic forecasters are best taken with a barrel of salt. Now it turns out that not only don't economists have a clear view as to where the economy is headed, they can't even tell with any accuracy where it's been.

In Britain, analysts were shocked when the Office of National Statistics (ONS) decided that the economy has been growing twice as fast as it previously thought. It seems that someone in the until-now merely useless Department of Trade and Industry had lowered it to downright dangerous by badly misestimating the level of construction activity. The revision raised from impossible to probable the prospect that the Treasury's prediction that the nation's finances would come right would prove spot on, rather than miserably off the mark.

In America, economists are trying to decide not only whether the current 5+ percent growth rate is a mere spurt, due to peter out when consumers have finished disposing of the tax rebates they have been getting in the mail, or is the start of another long-term period of above-trend growth. Some, like economists at Goldman Sachs, see danger ahead: "Conditions are ripe for setbacks in homebuilding and consumer purchases of durable goods. . . . Mortgage loan refinancing, one of two key drivers, has already plunged; the tax cut--the other driver--is having its biggest impact . . . in the third quarter."

Adding to the gloom are declines in the index of the Institute of Supply Management and various indices of consumer confidence, the refusal of China to allow its currency to rise against the dollar so as to increase the competitiveness of American-made exports, and OPEC's decision to cut back on oil production so as to shore up prices.

ENTER THE OPTIMISTS. The Institute of Supply Management's index, they point out, may have dropped a bit, but is still above 50, the level that indicates an expanding manufacturing sector. Consumers may not be in a chipper mood, but they continue to spend. The latest figures indicate a powerful 7.4 percent increase in consumer spending during the early part of the just-ended quarter, a year-on-year rise of 13 percent and 5.8 percent, respectively, in the number of vehicles sold by General Motors and Ford in September, a mini-boom at the nation's (indeed, the world's) largest retailer, Wal-Mart, and continued strength in the housing market. Better still, business spending recorded a second quarter gain of 7.3 percent, the biggest rise in three years, and likely to be sustained if reports that America's corporations are raking in the highest profits in several years prove accurate.

Add these two anecdotes: At dinner last week one of America's premiere dealmakers told me that there is so much buying power available to finance acquisitions, that a new wave of corporate takeovers is about to break upon us, to the joy of the investment banking and legal communities. And a few days ago, in the course of reviewing the state of the economy with a leading investment advisor, I learned that those close to the market, as she is, just don't believe their own economists' predictions of slackening growth. "We are in the midst of a worldwide economic recovery," this normally conservative advisor, responsible for billions of dollars of clients' money, told me. She has chosen to ignore the readings of her own economists, just as she shunned the advice of her irrationally exuberant colleagues during the booming '90s.

IT WAS EVER THUS--the economic tea leaves readable only through a glass, darkly. But now economists are admitting that not only are we uncertain about the future, we are not sure we know much about the recent past.

Consider the most politically sensitive of all U.S. economic statistics: the employment and unemployment rates. Professor Alan Krueger of Princeton University asks his readers to pick one of the following: "The jobless rate dropped in August; it didn't; we don't know." Writing in the New York Times, Krueger points out that the reported decline from 6.18 percent to 6.08 percent might be due to the error inherent in the sampling procedure used by the Bureau of Labor Statistics in its sample survey of 60,000 households.