Why do official statistics lag behind what we all know?
Yesterday both the Fed and the Bank of England spoke. The Fed kind of had bad news. At least, bad news in the sense that it told us things were tough in the US, but only kind of, because we already knew that, and the real surprise seems to be that it has taken the Fed so long to realise it.
As for the Bank of England, well, it seems to be ahead of the curve, and the real question mark in Blighty should be applied instead to the Treasury, which still seems to be stuck in the land of delusion.
Yesterday, the Fed revised its estimates for US growth this year. And it has gone from bull to bear. As recently as January, it was projecting growth of between 1.3 and 2 per cent this year. Given all the doom and gloom that was about at that time, those projections seemed remarkably good, even a tad unbelievable. Well, now the Fed has released its latest set, and this time it is predicting growth of between 0.3 and 1.2 per cent. Now that makes a lot more sense, although even that range still seems a little optimistic.
But it is curious how official data gets it wrong continuously erring on the optimistic side when things are getting worse. We have a sneaky suspicion that when the pick-up finally occurs, the Fed will once again be behind the curve,Â but this time will be too cautious.
But the Bank of England, on the other hand, seems altogether more switched-on to reality.
According to this morning’s FT, the Bank of England is now forecasting growth of 1.5 per cent next year. Twelve months ago, it was predicting growth of 2.8 per cent in 2009, but then a year ago things were very different, and perhaps you can’t blame the Bank for that.
The Bank’s pessimistic prognosis differs starkly with the Treasury, which still expects growth of between 2.5 and 3 per cent, so that is a huge discrepancy.
Mind you, even the Bank of England’s more pessimistic forecast still seems to be on the high side. If you believe the UK is lagging 12 months behind the US, then expect next year’s economic performance to be worse even than that.
The National Institute of Economic and Social Research has also been forecasting highish growth. For example, it recently forecast growth of 1.3 per cent in the US this year, and 1.8 per cent for the next.
It may be, of course, that the predictions for the various central banks and the NIESR are right. But, frankly, it seems more likely that they have grossly failed to grasp the seriousness of the current situation.
Maybe in their models they take insufficient account of human psychology, and have failed to grasp the factors that motivate us factors such as house prices.
After all, both US and UK growth have been down to high consumer borrowing. Consumer borrowing that in a previous era would have been considered irrational. Official statistics just seem to assume things will go on as before. That consumer behaviour is somehow an external factor; what an economist, or indeed a biologist, would call exogenous.
But in reality, human behaviour should form a part of these economic models. When things are going well, we all get optimistic and scream out for more stuff to buy and use phrases like “retail therapy.”
When things are not so good, we start saving and cut back, and stay at home and watch the Apprentice. This in turn makes the economic environment less favourable still.
So maybe human nature is in fact endogenous, and maybe that is why economic models fail to get it right.
© Investment & Business News 2013