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Who are the “Consensus Economists” and What Can They Tell You?

Who Are Consensus ExpertsThe Wall Street Journal Online is a useful source of information for amateur and professional investors alike. Unfortunately, most of its content is restricted to its paid subscribers and out of reach for anyone not willing to shell out $39.90 every 10 weeks for the digital access option. However, there are a handful of free applications the site offers and one of them will help shed light on the so-called “consensus economists” one hears about so often on the financial news shows. Who are these mysterious folks and what do they do? Actually, it is not all that mysterious. But sometimes it is helpful to know a little bit about what lies below the surface of the usual headlines.

The consensus economists inhabit a corner of the WSJ Online called “Economic Forecasting Survey” which is located in the site’s Market Data Centersection. The entire Data Center section is free and has some excellent graphics tools. At the bottom left of the page you can click on “About the Survey” to be informed that the Journal regularly surveys a group of 54 economists from a variety of financial institutions, economics consultancies, ratings agencies and government-affiliated organizations for a snapshot of where the economy may be headed. Who are these luminaries? That is not immediately apparent, but it is easy to find out if you know where to look. On the upper right section of the page, you will see a dropdown menu indicating the most recent survey data available (right now it reads “December 2011 Update”). If you click on the update, it will open an Excel spreadsheet on your computer. Click on the tab that says “WSJ Survey Dec 2011” (or whatever the most recent date happens to be), and there you will see the name and institutional affiliation of each individual comprising the consensus economists. Next to each economist are all his or her predictions in each of the categories the survey analyzes.

Why is any of this important? The WSJ survey covers a range of important macroeconomic data points. These include: GDP, inflation, unemployment, interest rates, and housing data, employing a variety of metrics such as Fed funds rate, nonfarm payrolls, quarterly GDP and average home prices. It is a very convenient one-stop shop for some of the most critical headline economic benchmarks. In addition to the numbers, there is supporting context to shed light on what the economists are thinking. For example, in the current month’s version we are told “the majority of economists say that the Euro zone is currently in a recession and another quarter say that while it hasn’t arrived yet a downturn is imminent”. That’s a useful little tidbit. What we can infer from this is that markets have probably priced a European recession into current price levels. So, if a recession were not to materialize, we might want to be long European stocks.

Are they trustworthy? Financial professionals don’t exactly enjoy a record high level of trust in today’s environment. What is useful about the Journal’s Team of 54 is that their affiliations are so diverse. For every market cheerleader from Goldman Sachs or Morgan Stanley, we have representatives from nonprofit groups like the Conference Board, ivory-tower academics from the likes of California State University, and consultants who toil away in firms with exotic-sounding names like Parsec and Econoclast. That’s not to say that there is no structural bias. It is a fact of life that economics forecasters on average tend to err on the side of optimism. But it is a diverse enough group to enable one to be a bit less skeptical than usual. And since you have access to each individual’s own estimates you can see how much variance there is – whether the sell-side analyst and the college professor have wildly divergent views on next quarter’s GDP, for example.

In investing, as in most walks of life, knowledge is power. Knowledge that is easy to access and doesn’t cost anything is even better.

Tell us…How closely do you follow the economic indicators influencing market performance?

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