The visible hand in economics

Correcting a slight swipe on forecasters

Posted on: December 9, 2008

Over at Financial Armageddon they state that:

Analysts naturally factor in the number of people who are out of work when they try to figure out future consumption patterns. But there is more to it, of course. People who are afraid they might lose their job are just as likely to economize or clamp down on spending as those who have no real choice in the matter. In fact, some might say that changes in the attitudes and behavior of the 85-95 percent (depending on which statistics you believe) of those who are employed matter much more than the financial wherewithal of those who aren’t

Now this implies that analysts don’t look at the feeling of those who are employed and as a result will not expect as sharp a fall in consumption. However, as an analyst I can say that we do pay attention to this fact – which is why we put such a weight on the unemployment rate when we forecast.

If we only believed that a weaker labour market caused lower consumption through the “people having lower incomes” channel, we would not expect a very big movement in consumption from rising unemployment. The fact that higher unemployment leads to lower job security is taken account of when economists use unemployment as a variable in their models – when we “factor in” unemployment we are taking into account the direct and indirect impact of this variable on consumption activity. (Note: A good way to partially separate these impacts might be to look at how both aggregate income growth as well as unemployment influence consumption – however, there are … issues.)

In fact, during the recent recession may analysts “over-estimated” the fall in consumption, at least here in NZ – as a result, I do not think this criticism is correct of analysis in New Zealand – it is more of a straw man argument that is trying to make us sound silly 😛

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2 Responses to "Correcting a slight swipe on forecasters"

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