Each month credit and equity market observers alike pounce on the Employment Situation Report from the Bureau of Labor Statistics. Markets gyrate wildly when the actual result is 40,000 or 50,000 payroll jobs away from the economic forecasts.
This is a big mistake. Here is the problem. The level of change that the market believes to be significant, is not great enough to be measured by the BLS tools. It is like measuring a hair with a grade-school ruler.
And that is just the measurement issue. It is even more difficult to forecast the results. We always enjoy reading Bob McTeer, whose blog is one of our featured sites. His recent commentary notes that economists are not very good at forecasting.
"Unfortunately for the reputation of economists with the general public is that they think the job of economists is forecasting. That's unfortunate because economists can't forecast very well. It just can't be done. Economists know that, and most will admit it, but they are stuck with it, especially if they wish to be employed as an economist outside academia."
His main point is that these predictions are difficult. People making forecasts should provide probability figures and ranges. (For a similar argument, check out Barry Ritholtz on The Folly of Forecasting). The problem is that when the forecaster is honest about the error range, the consumer becomes less interested. Well, so be it!
McTeer has a number of excellent points on using models and some Greenspan stories, so enjoy reading the entire article. After noting that most everyone is a "closet extrapolator" he writes as follows:
"I've always been amazed at economists who presumed not only to see around a corner, but to see around more than one corner, as in "the economy will pick up through year-end, then slow for several months, and then take off again stronger than ever." To me that sounds as silly as what they would say to the waiter after sniffing a wine cork."
It is something to think about the next time you hear some elaborate, multiple-turn economic or market forecast.