Just two days ago the 4th quarter GDP came out as a negative number, which was much worse than expected. In fact, not one of 83 analysts had anticipated a negative number, meaning they were all too bullish on the 4th quarter growth number. But yesterday the Chicago Purchasing manager’s index, a growth barometer, was way above expectations for growth, and not one of 48 analyst estimates was in the ballpark, meaning they were all too bearish on growth.
What’s going on here? Is the economy weakening or strengthening, and why can’t economists get close to predicting the data? First, there are sometimes events that are almost impossible for economists to precisely estimate. In the GDP report, there was the impact of hurricane Sandy, and a giant drop in defense spending, which some think was driven by trying to get ahead of sequesters that were part of the cliff talk that dominated the late fourth quarter. So we should cut the analysts some slack on certain issues that are hard to foresee.
Another reason for such big misses by economists is that gaming numbers in an environment distorted by quantitative easing and monetary backstops appears to be throwing the old models for a loop. One highly respected analyst we follow is convinced that most of the old economic models that were built in the 80’s and 90’s are not suitable for the current backdrop. He is convinced that most analysts are missing the impact that inflationary movements now have in our world, particularly since interest rates are now at levels that render them ineffective in moving the dial for world growth.
The reality is that it is tough to say whether whippy numbers are a temporary phenomenon or are here to stay. All that we can say is that volatile and confusing economic data is part of our world right now, and it clouds the degree of conviction that we have in our business cycle view.
The erratic nature of current economic data is one reason we maintain low conviction in our forecast, which translates into keeping our allocations pretty close to benchmark levels of volatility. Right now we continue to side with a view that the economic cycle is slow but getting marginally better, and have a tilt to cyclical holdings. But in this environment of jumpy data and oscillating markets, we don’t have the kind of conviction we would need to make a big bet.
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