Information Disconnect

 

It is Christmas time and I am experiencing the usual ups and downs of the season (mostly ups; thankfully).  There are still some minor decisions regarding where and with whom we are going to celebrate the season with.  It all seems to be working itself out.  We have taken a minor covid hit.  Again, it seems to be working itself all out.  This can be a stressful time of year.  Generally, a lot going on and many last minute changes.  We have been somewhat busy here (actually my wife does most of the heavy lifting).  However I have made my contributions.  The bins of  decorations did not climb down from the attic by themselves.  I have also been busy making Christmas presents for my grandkids.  Our Christmas this year is a little low key.  As I have mentioned in previous posts we spent 2 weeks in Europe this year as we celebrated our 40th wedding anniversary.  That provided more than enough spending for the year.  So we are just doing stockings for each other this year.

So this being the season of unbridled spending and there being numerous articles about the state of the economy I have decided to investigate and comment.  Our view of the economy factors into almost all of our decisions.  When and where we purchase major items, whether or not to switch jobs, and the groceries we buy are all affected by how we assess the state of the economy.  I have come to the conclusion that it is impossible to accurately predict what the economy will do in the future.  The future being anything from one day to 100 years.  One day? So called experts are rarely able to foresee mere minutes into the future.  Yesterday the Dow was about to set it's first record in almost 2 years then this (Dow tumbles).  If experts cannot predict what will happen tomorrow how are we supposed to?  If we are not comfortable with our view of the economic landscape how are we supposed to make decisions?  If you follow some of the financial advise of people such as Dave Ramsey or Tae Kim you are able to whether economic shocks.  They generally espouse a strategy of living beneath your means, having adequate savings, minimizing debt and investing for the long term.  However I would like to go beyond these strategies.  I would like to make sound decisions, also as a retiree my time frame for decisions is not the same as when I was in my 20's.   For example if I was going to move from our house to a rental property I would like to know if house prices were going to rapidly increase in the next few months.  If I knew that I would refrain from selling immediately wait for prices to increase and then sell.  To know the future may be a little too much to ask.

Looking online there is a wide array of predictions for the economy in 2024.  They range from rosy (the so called soft landing) to dire (deep recession).  How do these predictions help us make decisions about our future.  If you are like me your answer is "not much" (LOL).  I then came across this article regarding the economy and people's reaction (Economy Tanking?)   This article is a series of slides that begins with ones giving evidence of a strong economy.  Evidence presented: possible reductions in interest rates, a rebounding stock market, strong employment and lower inflation.  The second set of slides are focused on how people view the economy.  One slide references the NY Times and AP news polls that 70 to 80 percent of voters describe the economy as poor.

The remaining slides give snippets of information as to the source of this contradiction (economic data vs. people's description of the economy).  Reasons given are people's general gloominess spilling over to the economy and the fact that people took a big inflationary hit in 2022 and have not caught up.  This to me was the most striking slide.  It was accompanied with this quote:

Disconnect:

Betsey Stevenson, an economist at the University of Michigan, showed her confusion to The New York Times: "People say, 'Economists don't know why we're unhappy? Just look at the prices!' We're looking at the prices and wondering, why are you buying so much stuff?"

I love this quote for a couple of reasons.  The first has to do with some of the work of Richard Thaler and the field of behavioral economics.  I have posted about Thaler's work in the recent past (Econs and Nudges).  The economist Betsey Stevenson makes the assumption that people make rational decisions.  The assumption that people are "Econs" (Thaler's term).  The quote also identifies a contradiction of the masses.  If you say the economy is so bad why are you spending money?  This presents a series of disconnects that make it difficult to assess the state of the economy.  Economists are making assumptions that are not valid (assuming that people are going to act rationally).  People are saying one thing but do another (stating the economy is bad but spend money).   If this is the case how is any information about the economy going to be valid?