ARTICLE
Economic forecasting is the process of attempting to predict the future condition of the economy using a combination of important and widely followed indicators. Economic forecasting involves the building of statistical models with inputs of several key variables, or indicators, typically in an attempt to come up with a future gross domestic product (GDP), growth rate. Primary economic indicators include inflation, interest rates, industrial production, consumer confidence, worker productivity, retail sales, housing construction and real estate pricing, and unemployment rates. Economic forecasting is often described as a flawed science. Many suspect that economists who work for the White House are forced to toe the line, producing unrealistic scenarios in an attempt to justify legislation. Will the inherently flawed self-serving economic forecasts by the Federal government be accurate? As with any forecast, time will tell. The challenges and subjective human behavioral aspects of economic forecasting are not limited to the government. Private-sector economists, academics, and even the Federal Reserve Board (FSB) have issued economic forecasts that were wildly off the mark. Early last year and into the first two quarters of 2023, while the Federal Reserve Board began a series of rate increases to curb inflation, the economic forecasting community predicted we were headed toward a recession. Two economic reports that I follow, among dozens of economic data points I read daily, held strongly worded opinions that the economy just didn’t seem to be pointed toward that recession. Dr. Christopher Thornberg of Beacon Economics (a frequent guest speaker to our region) opined recently, “Much to the chagrin of those who have been predicting otherwise, the U.S. economy has stubbornly continued to grow—and 2023 is shaping up to be a better year than 2022.” You can review his report here: https://beaconecon.com/the-recession-that-didnt-happen/. Thornberg further states the rationale that leads to forecasting, “It might seem surprising that forecasters haven’t learned how to predict recessions better, given the technical tools that have been developed over the past 50 years. The first macroeconomic computer model was built by the University of Penn’s WEFA group back in the early 1970s, winning the group’s leader, Lawrence Klein, a Nobel Prize. Today’s economists have far more computing power at their disposal, not to mention a broader set of quality data to play with. Yet, in the aggregate, forecasters still seem unable to see the arrival of the economic tempest until it is already upon us.” The issue with these big macro models is that they are primarily designed to calculate economic trends based on a complex statistical estimate of co-variances found within the historical data. Such models rely on each expansion being similar enough to the previous one that these co-variances remain relevant. However, recessions are—by definition—a period when the economy deviates substantially from a trend. These sorts of forecast models simply don’t have the capacity to predict a recession, unless the forecaster specifically programs it in.” According to Dr. Mark Schniepp, California Forecast, he also notes the long-awaited 2023 recession just never materialized, which was predicted just six to eight months ago. The GDP is holding steady and the forecast for Q3 2023 (which ends at the end of September) shows over a 4% change annualized.These preliminary estimates of GDP growth are based on the most recent incoming data on the economy and to date, there has been strength in a number of indicators: People filing for unemployment insurance claims remain very low. The national unemployment rate remains at 3.8 percent. It is a percentage point higher in Santa Cruz County at 4.8 percent. • Consumer spending remains surprisingly steady. Retail sales posted their fourth consecutive month of healthy growth in July. Orders for goods, in general, rose sharply in June. • Retail spending remains steady despite the price increase for goods, especially higher-priced food and gas. • Industrial production is up with stronger trends in July. • Manufacturing is slightly better than expected. • Inflation is slowing as we move into the fall season. So where is the rub that has consumers on a jittery edge? It appears it is in these two indicators: Low consumer confidence at record lows has improved but still is a major concern. Consumers want predictability. The last year plus — even pushing back to the COVID era that bottled up most of our natural economic trends. Today, consumer confidence fell in August 2023, erasing back-to-back increases in June and July,” said Dana Peterson, Chief Economist at The Conference Board. “August’s disappointing headline number reflected dips in both the current conditions and expectations indexes.” And now we turn to California’s #1 policy issue: Housing. Nationally, we've seen a boost in new residential construction and a surge in new home sales from February to July. However, the latest data reveals a shortage of resale inventory, which is driving potential homebuyers towards the new-home market. This, in turn, is bolstering the demand for new construction. That trend is not holding true in California, and specifically along our Central Coast. We know that California housing prices far outpace the nation and the Central Coast has some of the highest-priced homes in the state. Here are more data points on our Santa Cruz County real estate market for the week of August 21 to August 27 (Courtesy of Dax’s Data). • Active Inventory: 347 homes (single family, condos+townhouses (-5% drop from last month) • New Listings: 59 (-15% drop) • Under contract: 39 (+4% increase) • Closed: 26 (-3% drop) • Months of Inventory: 2.3 • Median Price: $1,200,000 (-4% drop) • Average Price: $1,328,493 (-5.3% drop) • Days on Market: 28 (+1.70% increase) • Over Asking: -.77% (-0.67% drop) • Price/Sq.ft: $790 So where does this lead us for Q4 of 2023 and into 2024? Ultimately, recession forecasts can only be created through a complex interaction of theory and data to identify when and where economic trends become, so far unpredictable, as to ensure a recession when the process does eventually begin. From the perspective of economic forecasters — it is a mixed bag largely constructed by the various economic indicators and the severity of issues (global inflation, the war in Ukraine and a series of national and global climate disasters caused by Climate Change). Even climate change deniers can’t walk away from the tremendous toll on human lives lost, property and infrastructure damages in the billions. Human resilience is the strength that keeps us moving forward.
Economic forecasting is the process of attempting to predict the future condition of the economy using a combination of important and widely followed indicators. Economic forecasting involves the building of statistical models with inputs of several key variables, or indicators, typically in an attempt to come up with a future gross domestic product (GDP), growth rate. Primary economic indicators include inflation, interest rates, industrial production, consumer confidence, worker productivity, retail sales, housing construction and real estate pricing, and unemployment rates.
Economic forecasting is often described as a flawed science. Many suspect that economists who work for the White House are forced to toe the line, producing unrealistic scenarios in an attempt to justify legislation. Will the inherently flawed self-serving economic forecasts by the Federal government be accurate? As with any forecast, time will tell.
The challenges and subjective human behavioral aspects of economic forecasting are not limited to the government. Private-sector economists, academics, and even the Federal Reserve Board (FSB) have issued economic forecasts that were wildly off the mark.
Early last year and into the first two quarters of 2023, while the Federal Reserve Board began a series of rate increases to curb inflation, the economic forecasting community predicted we were headed toward a recession. Two economic reports that I follow, among dozens of economic data points I read daily, held strongly worded opinions that the economy just didn’t seem to be pointed toward that recession. Dr. Christopher Thornberg of Beacon Economics (a frequent guest speaker to our region) opined recently, “Much to the chagrin of those who have been predicting otherwise, the U.S. economy has stubbornly continued to grow—and 2023 is shaping up to be a better year than 2022.” You can review his report here: https://beaconecon.com/the-recession-that-didnt-happen/.
Thornberg further states the rationale that leads to forecasting, “It might seem surprising that forecasters haven’t learned how to predict recessions better, given the technical tools that have been developed over the past 50 years. The first macroeconomic computer model was built by the University of Penn’s WEFA group back in the early 1970s, winning the group’s leader, Lawrence Klein, a Nobel Prize. Today’s economists have far more computing power at their disposal, not to mention a broader set of quality data to play with. Yet, in the aggregate, forecasters still seem unable to see the arrival of the economic tempest until it is already upon us.”
The issue with these big macro models is that they are primarily designed to calculate economic trends based on a complex statistical estimate of co-variances found within the historical data. Such models rely on each expansion being similar enough to the previous one that these co-variances remain relevant. However, recessions are—by definition—a period when the economy deviates substantially from a trend. These sorts of forecast models simply don’t have the capacity to predict a recession, unless the forecaster specifically programs it in.”
According to Dr. Mark Schniepp, California Forecast, he also notes the long-awaited 2023 recession just never materialized, which was predicted just six to eight months ago. The GDP is holding steady and the forecast for Q3 2023 (which ends at the end of September) shows over a 4% change annualized.These preliminary estimates of GDP growth are based on the most recent incoming data on the economy and to date, there has been strength in a number of indicators:
People filing for unemployment insurance claims remain very low. The national unemployment rate remains at 3.8 percent. It is a percentage point higher in Santa Cruz County at 4.8 percent.
• Consumer spending remains surprisingly steady. Retail sales posted their fourth consecutive month of healthy growth in July. Orders for goods, in general, rose sharply in June. • Retail spending remains steady despite the price increase for goods, especially higher-priced food and gas. • Industrial production is up with stronger trends in July. • Manufacturing is slightly better than expected. • Inflation is slowing as we move into the fall season.
So where is the rub that has consumers on a jittery edge? It appears it is in these two indicators: Low consumer confidence at record lows has improved but still is a major concern. Consumers want predictability. The last year plus — even pushing back to the COVID era that bottled up most of our natural economic trends. Today, consumer confidence fell in August 2023, erasing back-to-back increases in June and July,” said Dana Peterson, Chief Economist at The Conference Board. “August’s disappointing headline number reflected dips in both the current conditions and expectations indexes.” And now we turn to California’s #1 policy issue: Housing. Nationally, we've seen a boost in new residential construction and a surge in new home sales from February to July. However, the latest data reveals a shortage of resale inventory, which is driving potential homebuyers towards the new-home market. This, in turn, is bolstering the demand for new construction.
That trend is not holding true in California, and specifically along our Central Coast. We know that California housing prices far outpace the nation and the Central Coast has some of the highest-priced homes in the state. Here are more data points on our Santa Cruz County real estate market for the week of August 21 to August 27 (Courtesy of Dax’s Data).
• Active Inventory: 347 homes (single family, condos+townhouses (-5% drop from last month) • New Listings: 59 (-15% drop) • Under contract: 39 (+4% increase) • Closed: 26 (-3% drop) • Months of Inventory: 2.3 • Median Price: $1,200,000 (-4% drop) • Average Price: $1,328,493 (-5.3% drop) • Days on Market: 28 (+1.70% increase) • Over Asking: -.77% (-0.67% drop) • Price/Sq.ft: $790
So where does this lead us for Q4 of 2023 and into 2024? Ultimately, recession forecasts can only be created through a complex interaction of theory and data to identify when and where economic trends become, so far unpredictable, as to ensure a recession when the process does eventually begin. From the perspective of economic forecasters — it is a mixed bag largely constructed by the various economic indicators and the severity of issues (global inflation, the war in Ukraine and a series of national and global climate disasters caused by Climate Change). Even climate change deniers can’t walk away from the tremendous toll on human lives lost, property and infrastructure damages in the billions. Human resilience is the strength that keeps us moving forward.