My finance view

The 19th-century British historian who first called economics "the dismal science" wasn’t talking about how hard it is, or about how frustrated the rest of us can get when the predictions of professional economists prove wrong.

But there’s a reason the nickname stuck.

Like weathermen, political pundits and everyone who thought the New England Patriots would win the Super Bowl, paid seers of the economy have made their share of gaffes over the years. And when they do, and when investors, banks and even governments act on faulty advice, the cost can easily run into the billions of dollars. Dismal, indeed.

But try predicting the direction of the economy, sorting the endless waves of data and indicators that may or may not be accurate, predicting actions and reactions like a chess game the whole world is playing, and anticipating the sudden, unforeseeable shocks that can rearrange the entire board.

It’s hard.

Yet there are people, including some here in St. Louis, who are trying to figure out ways to make it a little easier, a little more predictable, and develop ways to use those predictions more wisely.

THE ACADEMIC

Jack Strauss is one of those people.

He’s a professor of economics at St. Louis University and head of the Simon Center for Regional Economic Forecasting, which means he tries to foresee things like the housing and job markets here in St. Louis. He also writes papers on economic modeling, trying to figure out the best way to forecast, say, the stock market, or U.S. gross domestic product — the value of everything this country produces in a year.

"There are potentially 100 variables to forecast U.S. GDP," he said, everything from employment to interest rates to inventories. "But you don’t know which one to pick."

The answer, he said, is to "combine forecast," to take not just the 10 leading economic indicators but dozens more and analyze what they will mean. Sounds simple enough, but it’s not what most economists do, he said.

And it’s not really all that simple, because the relationships between the different variables change over time; for instance, in recent years, as people began borrowing more aggressively against their homes, housing prices became a more important piece of the equation. Tracking and weighing all that can get quite complex.

In his office overlooking Lindell Boulevard, Strauss has three computer screens and a wall full of economics textbooks to help him make sense of it all.

Still, he says, it’s "almost impossible" to answer with any certainty the million-dollar question: Are we headed for a recession?

"And that’s not really the right question to ask," he said. "We’re definitely undergoing a slowdown. The question is how big?"

THE PROFESSIONAL

To figure that out, lots of smart people turn to Chris Varvares.

He is president of Macroeconomic Advisers, a private economic analysis shop in Clayton. It’s one of a handful of such outfits in the country and has been forecasting the economy for more than a quarter-century. Its customers — the people it advises — include federal agencies, investment banks and Fortune 50 companies. Getting it right is important.

But it’s also hard because of all those variables filtering through the economy.

"Everybody knows you’re never going to be right all the time," he said easy payday loans. "And the probability at any time that we’re going to be exactly right is zero."

The key, he said, is to be close, say within a few tenths of a point on a prediction of GDP growth, and to have the correct view on the underlying fundamentals that are driving the economy at any given time. But the difference between slow growth and recession — the question economists are debating right now — is often only tenths of a point of GDP, and the fundamentals may not appear much different in either case.

Yet people want economists to tell them what will happen, and usually before the picture is complete, in response to a particular indicator that may or may not be a sign of broader problems. That, he said, can create a rush to judgment.

"There is this unholy alliance between the media and economists," he said. "If you’re an economist, there is a tendency, since you do want some media exposure, to make more outrageous predictions."

After all, no one wants a "maybe, maybe not" prediction. They want answers. And that can have consequences, because perhaps the most unpredictable variable of them all is consumer confidence.

Telling people we’re in a downturn, Varvares said, can make it so. Even if you’re wrong, it leads people to shut their wallets.

"I strongly believe you can talk yourself into a recession," he said.

THE END USER

That’s why it’s important to watch what people do with economic forecasts, people like Tom Kruckemeyer.

Kruckemeyer spent more than 25 years working for the Missouri Division of Budget and Planning. For much of that time, he was its chief economist, responsible for forecasting revenue for the state, so lawmakers would know how much money they would have to spend on everything from health care to police to roads.

To get the answer, he pored over analysis from groups like Macroeconomic Advisers and data coming from the "number mills" in Washington. He tried to predict the effects of new state and federal laws on spending in Missouri, and the impact of broad economic trends on income and sales tax revenue. And he mixed in a dash of his own instincts, his gut.

"Some years we were right on. Other years we didn’t do so good," said Kruckemeyer, who is now chief economist at the Missouri Budget Project, a group that advocates for the poor. "When you’re doing the job, you have to base your estimates on what’s known and what’s knowable and what’s reasonable, so that people can build a budget around it."

The problem comes when something unknowable happens, such as the terrorist attacks of Sept. 11, 2001, which jolted the economy and tossed state revenue projections into the air.

"No one could have predicted that," he said.

Yet it happened, and it led to shortfalls in Missouri and elsewhere in 2002 and 2003. Then came budget cuts and all sorts of bitterness: a situation both unexpected and, for lack of a better word, dismal.

tlogan@post-dispatch.com | 314-340-8291

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