The holiday season is finally over — and just in time, as far as we’re concerned. One more story about Xbox sales or yet another back-of-a-cocktail-napkin analysis of Christmas shopping trends, and we would have seriously considered taking CJR Daily’s multimillion dollar buyout and heading to Acapulco for good.
Actually, we’re keeping the plane reservations. For, as it turns out, the season for goofy, meaningless and intellectually dishonest stories is not quite over. We still have to endure the opening days of the new year, when reporters across the nation annually produce endless and unbearable stories offering unsolicited advice for how to play the markets in whatever economic climate they have predicted for the year ahead.
Kudos, though, to Humberto Cruz of Tribune Media Services for his honest column on market predictions. “I stand firm that personal-finance journalists have no business making them,” he wrote on Sunday. “Nobody can say for sure whether stocks are going up or down next year or where interest rates are headed. Still, many of my colleagues persist in this useless exercise, even if their results are no better than flipping a coin.” That said, Cruz went on to give his “expectations” for the coming year, the last of which was this: “The media will again be full of market predictions, all useless.”
Yes, it does seem that these stories just won’t go away. So it is that we endured yesterday’s front page article in the Wall Street Journal, headlined: “Growth May Slow In 2006 as Market For Housing Cools” (subscription required).
The story explains: “The consensus forecast of 56 economists surveyed by the Wall Street Journal is that the nation’s gross domestic product — the broadest measure of economic output — will grow at an annual rate of 3.5 percent in the first half of 2006 and 3.1 percent in the second half. While those growth rates are considered respectable, they would fall short of the 4.1 percent average of the past 2 1/2 years.”
Hmmm. Let’s take a closer look at the Journal’s “consensus.” First of all, we wonder how the paper derived its half-year figures given that the only numbers it provides in an accompanying table are quarterly (subscription required). Our best guess is that the Journal took the economists’ average prediction for first quarter growth (3.6 percent) and their average prediction for second quarter growth (3.3 percent), and then averaged these together to get 3.45 percent, which rounds up to 3.5 percent. Or perhaps they asked their pool of economists to offer predictions for the quarter, the half-year, the three-quarters-of-the-year, the 227th day of the year, and so on, and then averaged all those together and called it a “consensus.”
Either way, we are glad to report that there was, in fact, no “consensus” that “growth may slow.” The economists’ individual forecasts for the first quarter ranged from 2.2 percent to 4.7 percent. Five economists predicted growth of 3.5 percent (the anointed “consensus”), while the same number of economists predicted 4.1 percent growth, equal to the recent past. Forecasts for the second quarter ranged between 2.0 percent and 4.2 percent. The greatest number of economists (nine) pegged second quarter growth at 3.2 percent, while only five of 56 forecasters believed the economy would grow by 3.3 percent, the number that the Journal presumably used to derive its half-year consensus.
All this averaging reminds us an awful lot of what BusinessWeek did recently, when it took 54 forecasters’ guesses for 2006 corporate profit growth, ranging from 0.9 percent to 17.2 percent, and lumped them all together to get its final figure of 7.3 percent. Like BusinessWeek, the Journal tells us little about the people making these predictions.
Also like BusinessWeek, the Journal does not shy away from converting seemingly insignificant survey results into grand conclusions. Many of these are just plain weird. For example, eight economists out of 56 believe that a possible Fed slip-up is the biggest cloud hanging over the economy. This means that 48 economists think otherwise. But that’s fewer than the 15 economists who think that a crash in the housing market is the most worrisome possibility. Therefore, the Journal concludes, “The survey identified a potential monetary-policy mistake as the second-biggest cloud overhanging the economy.”
So how about the potential for a housing crash? We’re having trouble worrying, because right before suggesting that this is the biggest cloud hanging over the economy because 15 out of 56 economists said so, the Journal provides statistics suggesting that the market is actually still hot. First it notes that third-quarter U.S. home prices are up 12 percent from a year earlier. Then it points out that as of Dec. 14 banks’ total real estate assets are up nearly 14 percent from the year before. Aside from those 15 worried economists, the paper provides no other evidence of an imminent meltdown of the housing market.
Fact is, the Journal’s survey numbers can be sliced many different ways. And economic predictions are always wrong — especially when they’re made with a “consensus” rather than a calculator.