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Top US economists are often wrong – should we trust their predictions?

By November 19, 2023No Comments

(This column originally appeared in The Guardian)


They’re Ivy-League educated, brilliant academic minds and experienced in the ways of markets, governments, data and statistics. Many have access to information not readily available to the general public. They attend meetings, forums and conferences with each other. They write books, review papers and oversee research. They are our nation’s top economists. And they oftentimes get it wrong. Very wrong.

Both the treasury secretary, Janet Yellen, and Fed chairman, Jerome Powell, were wrong about inflation, having first called rising prices “transitory” after Covid disrupted the entire world’s supply chain. Nobel winner Paul Krugman publicly admitted his mistakes. They were not alone.

In 2021, 16 of the 36 living American Nobel economists declared, incorrectly, that “whatever upward pressure on prices all this new money (ie government stimulus) might bring there was no threat of inflation”. According to a recent report, 70% of economists polled by Bloomberg expected a US recession in 2023 and at the same time another poll from the National Association for Business Economics (NABE), found that 58% of economists believed there was a more than 50% chance of the US entering a recession this year. Never happened. GDP growth rate in the third quarter (4.9%) rivaled some of the strongest post-war periods in American history.

Could any of these people have told us 18 months ago that interest rates above prime charged to many of my clients would be in the double-digits today? Could they have had an inkling that, despite wars, volatile prices, historically low housing affordability, uncertain markets and wages that have been trailing sticky inflation levels that American consumers would still continue to spend at historically high amounts? Our great economists missed all of that too.

Now, many of them are making their economic predictions for 2024. Which begs the question: should we even be paying attention? This data is critical. Business leaders are making budgets, deciding on hiring plans, targeting their investments, and understanding the economy plays a huge role in those decisions. Base your strategies off bad data and you could find yourself losing money next year. That impacts not only your cash, but your ability to employ people and grow your business. It’s a big deal.

There are sites like Trading Economics and Fred that can bury you in all sorts of arcane economic data from worldwide steel production to plant capacity utilization to the price activity of corrugated shipping containers. Some of this stuff gets reported in the media. But after almost 30 years of looking at this information I’ve come to the realization that most of this data isn’t very useful. Why? Because most of it ignores the core driver of the economy: the consumer.

So if you want to know how 2024 is going to be, pay attention to these consumer metrics:

Paychex and ADP employment indexes

These are the two largest payroll service providers in the country and every month they release data about employment and wages. Their data is based on actual payroll from actual companies. When wages are growing that’s a sign of strength in the job market as employers are willing to pay more for talent. Spoiler alert: wage growth is still pretty strong and unemployment remains low, both good signs.

Consumer delinquencies

Consumer loan delinquencies are gathered monthly and directly from banks across the country by the Federal Reserve as well as auto loan delinquencies. Mortgage delinquencies comes from the Consumer Financial Protection Bureau. These are backward-looking, but all of these numbers are rising, which is not a good sign.

Consumer and small business confidence

I’m not a fan of surveys because they oftentimes come with an agenda. But both the University of Michigan and the National Federation of Independent Businesses have been doing their consumer and small business confidence surveys for decades. The numbers are consistently analyzed and have enough of a history to rely on trends. Both levels of confidence are very low and trending down.

Bank CEOs

Every quarter our nation’s largest banks release their earnings and their CEOs tell it like it is. So how is it as of 30 September? Charles Scharf the CEO of Wells Fargo says “while the economy has continued to be resilient, we are seeing the impact of the slowing economy with loan balances declining and charge-offs continuing to deteriorate modestly.” Jamie Dimon who runs JP Morgan Chase warned “currently, US consumers and businesses generally remain healthy, although, consumers are spending down their excess cash buffers” and that “this may be the most dangerous time the world has seen in decades.” Jane Fraser, CEO of Citi also warns that “we are seeing some cracks in the lower [credit score] consumer.”

Retail CEOs

They’re far from perfect, but if there’s anyone who’s got a pulse on the consumer it’s the big companies selling directly to them. What are they seeing? Brian Olsavsky, Amazon’s CFO, says “consumers are still spending, though are “deal driven” and focusing on lower cost items”. Jeff Gennette, the CEO of Macy’s says that “we continue to see uncertainty in the macroeconomic environment.” While the National Retail Federation is predicting strong holiday sales, not one big-box CEO that I’ve followed has expressed lots of cheer for 2024.

These are not government surveys and they’re not from an economist sitting in Cambridge or New Haven.

This information is from real-life companies based on their real-life data and it’s all about the consumer. It’s about what people are getting paid and how they’re spending their money. And when the consumer stops spending, that’s when the economy slows. You don’t need an economist to tell you that.

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