Last week, the IMF upgraded its forecasts of global economic growth for 2018 and 2019 by 0.2 percentage points. The revision reflects better than expected activity levels around the world, but mostly it’s due to burgeoning US economy. In fact the IMF upgraded its expectations for US economic performance by a whopping 30 per cent (0.6 percentage points).
Given that the IMF’s projections are released every three months, the 30 per cent revision to the world’s biggest economy is as sudden as significant.
To be fair, half of the upgrade was is due to change in US policy settings. The US Government approved a tax reform package in December. The package is expected to have significant domestic and international effects on investment, exports and overall growth.
The other half however, shows that the IMF were caught off guard. US consumption, construction and investment activity was higher than expected last quarter, and now shows no signs of slowing down. The same goes for US labour markets. In fact, only one other time since 1969 has the US unemployment rate been this low (4.1 per cent).
For any forecaster, surprises are the most challenging problem they need to overcome. Forecasting requires the forecaster to predict the future. A surprise is, by definition, when one of those predictions goes wrong.
Unfortunately, when you rely on historical data, surprises are inevitable. It’s like trying to steer a car while only looking in the rear view mirror.
The trick is to find signals that help identify the speed humps and bends in the road that lie ahead.
The excitingly titled Beige Book is the Federal Reserve’s attempt to do just that. The report tries to identify emerging trends in the economy that may not be readily apparent in the data. The report is released every two months and provides a summary about conditions as observed by Federal Reserve field officers. The Beige Book is unapologetically qualitative in nature, informed by anecdotes and conversations with industry.
The report provides “real economy” insights at a sectoral level that would be otherwise unobtainable from any analytical or modelling exercise. For instance:
A manufacturer of toys said that sales in the holiday period were lackluster. The weakness was partly due to the fact that there was only one blockbuster movie with tie-in potential… (Boston)
The abnormally cold December temperatures lifted sales of warm weather apparel, and long lines of last minute shoppers were noted at mall jewellery stores. (Philadelphia)
Several homebuilders reported that they have not seen the typical seasonal decline in demand. One builder attributed this situation to low interest rates, a healthy economy, and low inventory of existing homes. (Cleveland)
Trucking companies experienced a robust peak season due to substantial increases in e-commerce volumes… (Atlanta)
In the January edition of the report, messages about business’ inability to fill vacancies across a range of sectors was particularly apparent.
Businesses across all industries have had increasing trouble finding qualified workers, with some retailers struggling to find adequate seasonal staff. (New York)
Every business we talk to, they can’t hire enough workers,” said a western Wisconsin banker. A transportation company executive said it was failing to see growth because it can’t find drivers. A manufacturing firm in southeastern Minnesota said it consistently had 40 openings to fill, and was losing out on available work because there were “not [enough] people to take the jobs.” (Minneapolis)
Some of the most hard-to-fill positions were restaurant workers and chefs, construction workers and managers, nurses, retail workers, administrative assistants, software engineers, electricians, and truck drivers. A trucking company said that the labor shortage left many trucks sitting idle and was putting upward pressure on driver wages. (Richmond)
By no means is qualitative “data” like this is a substitute for quantitative methods. But its complementary value cannot be denied. The IMF’s $118 billion correction however, would suggest that it’s a little undervalued.
Post script: Fresh off the heels of releasing their 2030 Strategy, the Office of Innovation and Science Australia are now looking for an EL1 to join their Innovation System Impact team. I know these guys well, it’d be a great gig!
TALES FROM THE LONG TAIL 