If recent news headlines about the economy seem confusing, don’t worry. The situation is both understandable and normal.
Two weeks ago, many economic gurus quoted by the media predicted that the government would show no economic growth for the first quarter of 2001. The numbers actually showed output grew at an annual rate of 2 percent. That is not a roaring boom, but it is far from recession.
This past week, a respected survey found that consumers had less confidence in the economy than in preceding surveys. But a Department of Commerce report described actual consumer spending as up from the prior period and strong relative to historic levels. More firms announced prospective layoffs recently, supposedly because of a weakening economy, but on the same day the government described surprising strength in construction.
Given this information, intelligent lay persons are justified in wondering “What the heck is going on? Are we going into a recession or not?”
Years of study and experience allow me to give a definitive answer: maybe and maybe not.
Let’s take the growth numbers first. It is important to remember that the 2 percent output growth number reported on April 27 results from the so-called “advance” tabulation performed by the Department of Commerce’s Bureau of Economic Analysis. It is only the first of three initial estimates of the value of output for the January to March 2001 period and is the least precise one.
This “advance,” (formerly titled “flash”) estimate, will be followed on May 25 by a “preliminary” version and in late June by a “final” one. But even the “final” one will be subject to annual and “comprehensive” revisions, as more reliable data becomes available.
The government takes care to point out that all these numbers are statistical estimates, not precise measurements. At the end of its press release, the BEA lists the ranges of error for past estimates and concludes that the 2 percent estimate “is not likely to be revised below 1.4 percent or above 2.9 percent in the next two releases.” This caveat seldom makes it into news stories.
The way to read this report is that output apparently is growing modestly, somewhere between 1 percent and 3 percent. This is well below the average for the 1990s but far from a recession.
What about the apparent anomaly of consumers expressing pessimism about the economy in a University of Michigan survey in the same period that the government said consumer spending was relatively strong? This may be due largely to the thinking behind the old joke, “a recession is when your neighbor gets laid off, a depression is when you are laid off yourself.”
Experience shows that verbalized opinions are very susceptible to suggestion. If lots of economic gurus or government leaders describe bad times ahead, people frequently express a more pessimistic outlook, even if the situation of their own household, firm or community has not changed.
But actual behavior—as opposed to expressed opinion—is governed more by immediate personal situation than by descriptions of the nation as a whole. Economists talk about “revealed preference;” ordinary people say “Watch what she does and not what she says;” and the Bible said, “By their fruits ye shall know them.” The idea is the same: What people do reveals more of what they believe than what they say.
Even in the best of times, economic activity is so complex that we can never know exactly what is going on for the nation as a whole. Modern surveys and sophisticated statistical techniques can yield data that is helpful to businesses and to policy makers. But such information generally consists of estimates that are subject to some degree of imprecision.
The economy is undergoing structural change, from an emphasis on goods to increased value of services, and from one where information is printed to one where it is largely digital. Simultaneously, the economy is passing from a business cycle boom phase to one of slower growth.
It is entirely understandable that economic indicators can be mixed and even contradictory. Economics is not an exact science, if it is a science at all. GDP and consumer spending numbers give better information than the pigeon entrails examined by Roman seers. But even the present era is subject to a great deal of uncertainty.
© 2001 Edward Lotterman
Chanarambie Consulting, Inc.