Does my interpretation really matter?

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Economic forecasting is by no means exact.

In fact, forecasters are sometimes happy when they get close to the actual number, and other times they are happy when they forecast the turning point. There are times when one is valued more than the other.

Although this might seem odd, the bigger issue is the value of numbers rather than making qualitative statements that are typically subjective.

Numbers are numbers and interpretations are, well, just that.

So, how does this relate to forecasting the local economy? I have been called on to provide my forecast to various agencies that are formulating policy. The numbers, however, are often meaningless.

Consider the following: The unemployment rate is 5 percent. Is this good or bad? What if the unemployment rate is falling (from 5 percent)? This could be considered good news.

The point is that the number that is forecasted is important, but so is the direction of the forecast.

There is more to the forecast than just presenting numbers. Policymakers and the business community need to know where the local economy is heading and what factors drive the economy.

Although different forecasters can have different predictions, there is usually a standard approach to generating a forecast. An economic forecast is based on economic relationships that are represented in a model.

So, why are forecasts different? First, forecasters cannot predict such events as natural or man-made disasters or oil disruptions, to name a few. In addition, how such events affect the economy is not known until later.

Second, forecasters employ different models to predict the economy or different parts of it. Even similar models will have different assumptions about the underlying relationships.

Forecasts are just that: forecasts. The value of such forecasts comes from businesses and policymakers wanting a better understanding of how the economy is doing and where it might be heading.

Lack of such forecasts leaves consumers, businesses and community leaders looking for alternatives. Besides hiring outside agencies, they could examine economic data and provide their own interpretation.

Other alternatives include reading what business writers say about the economy in various newspapers and business magazines.

So, you might be asking how the economy is doing. Interesting that you ask, because I noticed The Augusta Chronicle running a poll (on Nov. 20) asking, "How do you feel about the direction of the US economy?"

These are very interesting polls to look at. Consumer attitudes and confidence about the economy can be extremely powerful (even as part of the forecast). The lack of alternative information might lead consumers to use this type of information as a source on how the economy is doing, believing the consumers cannot all be wrong.

Well, yes, you can all be wrong. For example, I ask my economics class how is the weather outside and the consensus is that it is nice.

Several students indicate that the weather is great for playing golf and since they know that I play, they think this is the barometer I use.

Other students who overdressed because it was cold in the morning disagree. Again, others might disagree because they are conscious of global warming and believe the temperature should not be as high as it is. So, to them the weather is not good.

Wait a minute. At no point did any student comment on the temperature. They used value judgments from different perspectives.

The students could have told me the temperature outside and let me make my own judgment. Or better yet, tell me the temperature and whether it is going to get warmer or colder through the day.

How is Augusta's economy doing?

Well, I am working on generating an economic activity index via a statistical model using key economic indicators for Augusta. In addition, this index will provide a numerical representation of how the economy is doing.

For example, I could tell you that the index is 105.9, but that would mean very little unless I tell you the various benchmarks and how we are doing relative to other times. Since the index is still under construction, I will leave further details for a later column.

I end this column with the following remark: Although numbers are not the only component to the forecast, they are made available so others can make their own educated judgment on how the economy is doing.

Consumers can question my narrative, but numbers are numbers.

When the temperature outside is 80 degrees, I think it is great weather for golf. If you disagree with my narrative, fine. If you disagree with my temperature reading, then pull out your thermometer and tell me your reading.

Mark A. Thompson is the Cree-Walker professor of business administration at Augusta State University. He can be reached at mthompson@aug.edu.


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