Saturday, January 3, 2015

Warning! Forecast Safely!. . . Economists Ahead.

  Nothing against Economists. Heck, my daughter Emily has a degree (ahem, with honors) in Economics from the University of California at Berkeley.  But given that, I'm sure Emily will be the first to agree that like all the social "sciences," Economics is as much art as analysis, especially when it comes to forecasting. Having just read the forecast for South Dakota's economy made by a team of Economists at Creighton University in Omaha, Nebraska, I'm more cognizant of that than ever. The Creighton U. team, headed by Dr. Ernie Goss, puts out a much-followed forecast for a cluster of states in the middle of the country.
King Corn.  Forecasters missed the effect of the '10-'11 run-up
and the '13-'14 selloff.
 
(graph from www.agriculture.com)
      Their just-released December outlook for the next  couple of quarters gives an Economist's equivalent of a "thumbs up" to South Dakota. By itself that's encouraging, but before we--and any economic planners in our state government--break out the bubbly, let's review the analysis and look back to the Creighton U. forecast made in early 2014.  The study itself is basically a compilation of traditional indicators relied upon by economists.  From the current report: "After moving below growth neutral in November of 2012, South Dakota’s leading economic indicator has been above growth neutral 50.0 each month since. The Business Conditions Index, from the monthly survey of supply managers, increased to 52.4 from November’s 51.5. Components of the overall index for December were new orders at 47.1, production or sales at 64.7, delivery lead time at 64.3, inventories at 34.7, and employment at 51.3. “For 2014, South Dakota manufacturing tied to energy pushed state growth into a healthy range." In standard qualification typical of econo-speak, Goss adds.  "However, the sharp cut in oil and agriculture prices will reduce South Dakota’s growth for the first half of 2015. Even so, I expect growth to remain positive for the first half of the year."
     That last nod to commodity prices was actually a pro-forma, if unquantified by analysis, hedge by Goss.  I believe he realizes that his team completely missed the impact of the grain markets in its way overly optimistic report last Spring. As I scan that set of current indicators I wonder how Goss and his team could be relegating the obvious, namely the price of commodities, to an afterthought.  To my "informed layman's" eyes, it seems to me that the economic fortunes of an agriculturally saturated economy like South Dakota's all start, literally, from the ground up.  The numbers relied upon by the Creighton team look like indicators that I would expect to find in analyses of economies that are manufacturing- and service-oriented, not those in which commodity production is at the core. I think Goss's work doesn't put enough weight on the effect that grain prices have on South Dakota's economy, a conclusion I come to after having spent a couple of decades successfully trading grain and livestock, both at the exchanges in Chicago and right here in South Dakota.  It was especially clear to me when I visited our office in Brookings, where the corn and bean markets virtually defined the economic conditions of the region.  
     I recall being dismayed in early '11 by Governor Daugaard's slashing of his first state budget because of grim economic forecasts (I'm guessing created by the Goss team).  It seemed nuts to me at the time because grain and livestock markets were clearly running up to their best prices ever, an economic boost that I was certain would result in better than forecast conditions for growth and render Daugaard's strapped-for-cash scenario overly miserly.  As it turned out, taxable sales in '11 were up a stunning 9.2%, the surest indicator of how our state's economy is getting along.  
Economist Dr. Ernie Goss, Clairvoyant In Good Standing
(photo from nebraskaradionetwork.com)
       None too surprisingly, Governor Dennis Daugaard probably used the Goss team's overly optimistic numbers from early 2014 to paint a politically advantageous picture of South Dakota's rosy outlook. Certainly Daugaard and his staff did nothing to distance themselves from the unjustifiably bright outlook prepared at Creighton. Note Goss's conclusion: "Based on our survey results, I expect the rate of growth to quicken in the months ahead."  In fact, growth slowed dramatically following the report.  More relevant to state policy, it's reasonable to conclude that Goss's scenario was the basis for Daugaard's perky outlook for South Dakota's economy last January, which turned into a badly missed  set of projections that were laid out during Daugaard's grim recitation of one slashed forecast after another during the Governor's budget address a month ago.  Both Goss and Daugaard just plain got it wrong.  
Me, Wooing Dr. Christina Romer, Former Chair Of The
President's Council Of Economic Advisors.

See?  I Like Economists.  I Really, Really Do
(Photo taken at UC Berkeley by Emily Tsitrian)
     And now for an afterthought of my own: why doesn't Daugaard reach out to home-grown and -nurtured analysts who have a better feel for economic conditions in South Dakota? Probably because our state's university system can't provide them.  The USD Economics Department stresses teaching.  The SDSU Econ Dept stresses applied research, mainly in connection with agricultural industry needs, which covers plenty of micro- territory and does it very well, I'm sure. But when it comes to macro research and analysis for use by public policy makers?  That's a missing component from both departments. A glaringly missing component.  

     
     
     


 




     

5 comments:

  1. Interesting, John! Let me see if I understand your critique: Goss's numbers come from purchasing managers who are looking at raw materials and supplies inventories that correlate largely to manufacturing. Farmers and ranchers aren't buying from these purchasing managers, so their impressions aren't capturing what's going on in the ag economy, at least not directly. Am I reading you right?

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    1. That's how I see it. The big miss in 2011 seemed to be predicated on the fact that the general economy around the country was still struggling and ignored the sizable run-up in grain and livestock prices that was South Dakota-specific. Same goes for the earlier miss this year, which started off with optimistic indicators more suited for a manufacturing-based economy and overlooked the debacle in the grain markets.

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    2. Fascinating. Very good analysis. I'd be interested to hear the response from the Governor and his economic advisors on the use of the Creighton numbers.

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    3. I remember complaining to some folks in '11 about Daugaard's indifference to the soaring prices that were occurring under his nose in the grain markets and how they would inevitably impact SD's economy to the upside--my complaint being that he didn't have an economist either on staff or as a consultant. Similarly, when he made all those bullish remarks in his SOS speech last January I was wondering if he understood the implications of the grain market debacle that was going on. He needs better advice.

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  2. Here's the thing about utilizing SoDak-specific economic analysts (if any can be utilized) though: If anyone was influenced by 1980s and 1990s economic conditions in SoDak (that would be me!), they would most like pick the path Gov. Daugaard picked in 2011, AND STAY ON THAT PATH. At which point, a fair number of outsiders would yell something toward those analysts about missing the forest for the trees.

    Furthermore, should you not consider the overall culture of SoDak when it comes to economic forecasting? I think we can all agree that, despite the presence of Citibank and CapitalOne in Sioux Falls, SoDak is quite the frugal culture. So much so, that it is near the top in average FICO score held by the average citizen.

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