By Karl Smith
Dennis Lockhart notes that the economy is now starting to beat expectations on a regular basis
The somewhat overlooked story of the period since the end of August is that much of the incoming data have exceeded most forecasters’ low expectations. For the third quarter at least, it appears that downgrades of growth forecasts have been too pessimistic.
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In support of this view, I’ll paint a picture from our working with the data. We at the Atlanta Fed regularly monitor the data series that directly enter into the GDP calculation, along with important other series, including employment. We compare these data elements to Bloomberg’s published consensus expectations for each. In the months leading up to July, the downside surprises in the data dominated. In August and September, upside and downside surprises were roughly equal. But in October, the surprises have generally been to the upside. Importantly, these surprises to the upside exceeded expectations by a significant measure. I’ve concluded an unqualified narrative of a downward trend is unjustified.
An important aspect of making forecasts in an uncertain environment is to deconstruct the narrative. This doesn’t always work of course because things can happen which are beyond your capacity to imagine. Nonetheless, you give your estimates a second look if you can’t tell a story about how they come to be.
In particular, looking at the Summer Slowdown, it was easy to tell a story about temporary shocks. A tsunami, an oil crisis a potential debt crisis. Yet, it was a bit harder to tell a story about the economy taking a nose dive.
Was construction going to contract further? How, into where? Was the pace of teacher layoffs going to accelerate going into 2011? What would that imply for class sizes. Is it realistic to think the local electorate would tolerate that?
Manufacturing is a different story. We could talk about some real losses there because we were in a mini renaissance. All that had to happen was a return to the normal pattern of decline.
Still, it was hard to couple that with a full story about the economy turning significantly down rather than just the same crappy jobless recovery we had the last two go ‘rounds. We would need a big shock to make a huge drop make sense.
That’s not say one isn’t waiting in the wings, but it is to say that “stall speed” thinking never quite made sense to me. There are a lot more stories one can tell about growth that gets a spark and jumps into high gear than about a self-fulfilling downward spiral. Self-fulfilling stagnation – sure. But, downward spiral? We need a strong outside force to make that believable.