Economic forecasting is often more story-telling than statistics

For many months economists have been puzzled by the lackluster pace of recovery. There are explanations of course: A still over-leveraged consumer, a slowdown in corporate investment, weak exports, fiscal uncertainty. Still, the numbers should be better by now. So what gives? Well, economist Robert Shiller suspects that there's something else going on. From Project Syndicate:

A fundamental problem in forecasting nowadays is that the ultimate causes of the slowdown are really psychological and sociological, and relate to fluctuating confidence and changing "animal spirits," about which George Akerlof and I have written. We argue that such shifts reflect changing stories, epidemics of new narratives, and associated views of the world, which are difficult to quantify. In fact, most professional economists do not seem overly glum about the global economy's prospects. For example, on September 6, the OECD issued an interim assessment on the near-term global outlook, written by Pier Carlo Padoan, that blandly reports "significant risks" on the horizon - the language of uncertainty itself.

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This brings us to the importance of stories - and very far from the kind of statistical analysis exemplified by Stock and Watson. Psychologists have stressed that there is a narrative basis to human thinking: people remember - and are motivated by - stories, particularly human-interest stories about real people. Popular stories tend to take on moral dimensions, leading people to imagine that bad outcomes reflect some kind of loss of moral resolve. The European crisis began with a Greek meltdown story, and it appears that the entire global economy is threatened by events in a country of only 11 million people. But the economic importance of stories bears no close relation to their monetary value (which can be measured only after the fact, if at all). It depends, instead, on their story value.

That can be seen in the U.S. as well. It's not enough to simply report on the jobless rate. TV and even newspapers feel compelled to dredge up some poor soul at the unemployment office who will speak of his or her difficulty in finding work. It makes for a quote, perhaps even a full-blown story, but it's not necessarily reflective of the greater reality about the economy. Unfortunately, these comments conveniently affirm the narrative du jour, however misleading it might be. And the more we hear about a supposedly weak economy, the more reluctant employers will be to add positions. It's a nasty spiral - made all the worse by political motivations to emphasize how bad everything is.