91Èȱ¬

What next for US economy?

• Evan Davis | Stars and strife |
• 26 Nov 07, 10:22 AM

Where will the American economy go next year?

Perhaps it'll help you answer this if I tell you that last year it grew 2.9%; this year it is set to grow 2.1%.

Rather than get caught up in the decimal points of forecasts for next year, think about three scenarios.

a) next year's growth number is significantly below this year's;
b) next year's number is about the same as this year's; and
c) next year's number is larger.

The argument about the economy's prospects at the moment is between those three options: there are those who think there's downward momentum; those that think the slowdown currently occurring will be contained and those who think it will be a small temporary phase before the economy reverts to the norm.

Now, talking to folks out on the streets – from market traders to students – I find a variety of views about the economy. But it is conspicuous how many people are upbeat about things, and assume there is little reason to get very worked up.

And even more interestingly, the same is true of the professional economic forecasters.

The optimists may be right. I can't stress that enough. I am still surprised however, there are so many of them.

According to the ever-useful Consensus Forecasts the average forecast for next year is that US growth improves marginally to 2.3%.

But that underplays the optimism. Half the forecasts out there are plainly built on the assumption that by the second half of next year, the US is back on its old upward trajectory.

The most optimistic of the professional forecasters is The Conference Board, a large and respected non-profit business think-tank. It expects US growth to re-bound to 3.0%. Bear Stearns thinks the US will grow 2.7%, as does Fannie Mae (the government-backed private mortgage guarantor organisation) . The National Association of 91Èȱ¬ Builders expect the economy to grow by 2.5%.

If any of them are right, you would say that is quite a result, given everything that is happening at the moment.

Only two forecasters think the economy will slow-down very significantly. The Economist Intelligence Unit and Merrill Lynch. And no-one appears to be predicting a recession.

Now, I am not one to criticise forecasters. But I can't help but feel there is a bit of anchoring going on.

You know what anchoring is? It is a tendency to produce numbers that are close to ones that are already in your head.

Famously, it has been shown for example, that if you ask people the percentage of African countries that are members of the United Nations, you will get higher estimates if you first ask people whether it is more than 65%, than if you first ask them whether it is more than 45%.

Experimenters that get people to look at totally arbitrary numbers – like social security numbers – and then to guess something quite unrelated, tend to find a bias. People with higher social security numbers come up with higher results.

Bizarre I know, but well documented. (Indeed, the discovery of this tendency was part of the reason won a Nobel prize.)

Now I think the fact that growth has tended to be around 3% in the US in recent years, might be anchoring expectations. It's not quite the same as using social security numbers to make predictions. But forecasters are undoubtedly subject to the same kinds of cognitive mistakes that the rest of us are, and they might simply lack imagination in thinking about the many different paths the US economy could conceivably follow.

Why else would forecasters be so happy about the prospects?

Joseph Stiglitz (who I mentioned yesterday) puts it down to the fact that Wall Street forecasters have to be professionally upbeat to sell stocks. They are not liars, they just live in a world where you learn to believe what suits you. (Similar considerations might be alleged of
those forecasters tied to the housing industry).

But actually the Wall Street forecasters are not always the most optimistic at all; they are scattered throughout the distribution.

So no I don't think in general that explains it. I think anchoring is the answer. Anchoring to the idea that normal service will soon be resumed.

And it might be. But in general, economies almost always revert to their long term trends in the long term, but exhibit far more volatility in the short term. And the long term is longer than six months.

It's quite rare for a downturn as serious as the one now underway to be over by next Christmas, given there are with so many unresolved problems in the banking and housing sectors.

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