More Evidence the Economy is Improving – Experts Say Economic Prospects are Bleak

Trust the Experts – To Be Wrong

Economic forecasting is the most perilous of tasks.  No matter who says what, no one, and we do mean no one, can accurately forecast economic activity for the future year or longer.  The problem is that there are just too many unknowns, and too many random disturbances to make predictions accurate.

This of course does not stop forecasting and forecasters, including The Dismal Political Economist from prognosticating.  But unlike the so-called experts, The Dismal Political Economist expects to be wrong more often than not.  This is not to imply that the experts will be right more often than they are wrong, they won’t be, they just don’t admit it.

So what the rest of us can take from the following headline in the New York Times

Signs Point to Economy’s Rise, but Experts See a False Dawn

is that this is about as strong an item of evidence possible that the economy will be stronger not weaker during the first half of 2012.  Sure, the “experts” do point out legitimate concerns.

There are two reasons for the renewed pessimism. First, economists say that temporary trends increased growth in the fourth quarter and may not continue into next year. Second, the economy faces significant headwinds in 2012: some from Europe’s long-lingering sovereign debt crisis, and some from domestic cutbacks beyond the control of President Obama, whose campaign would like to point to a brightening economic picture, not a darkening one. Even the Federal Reserve is predicting that the unemployment rate will remain around 8.6 percent by the time voters go to the polls in November.

But there are cyclical and technical reasons why the economy should not slow down early next year.

One of the technical issues is that recessions tend to run out of gas, the same as expansions.  Consumer spending, which drives the U. S. economy will increase because consumers must replace things like autos and major appliances.  Furthermore, consumers are becoming more confident, and new electronic gadgets are getting a lot of attention.  The gadgets require spending for add-ons,   so spending on them instigates more spending.

There is also a lag, which economists understand but don’t seem to remember, between policy actions and results. Future home owners and builders don’t just go out and buy and build the day after interest rates drop, there may be 6 to 18 months of lag time before they react.  Similarly, business does not hire immediately when the need new employees, they wait until they have used up overtime availability of existing employees.  A continuing sign of progress is the decline in new jobless claims.

There is no question that there are huge risks on the horizon, Europe could have a severe negative impact on the world economy, the lack of effective government in Washington can doom the growth of investor, business and consumer confidence and a new, unknown shock to the economy is always possible.  But right now the signs are positive, and the most positive of all is that the “experts think they are negative.