Question: Why did the economist cross the road?
Answer: To join the consensus forecast.
Economic forecasters have a habit of running with the pack, where there is safety in numbers.
No one can really see the future of course, but inaccurate economic forecasts are not really what bugs many professionals trying to get a handle on what’s going on in their particular industries. The irksome thing is the habit economists have of echoing each other’s superficial and often wrong pronouncements about what is happening in the present.
As John Kenneth Galbraith, the celebrated Harvard economist once noted drily: “The conventional view serves to protect us from the painful job of thinking.”
So it was again this month when most of the macroeconomics profession came out in a single chorus to cheer the retail trade data, which showed a seasonally adjusted 1.2 per cent increase for the latest month.
Retail was in such good shape, apparently, that the ANZ’s senior economist was even reported to chirp that the RBA’s interest rate increases were “not much of a concern to households.” (A trumpet call to raise them further?)
In Australia, macroeconomists are the media go-to guys for commentary on retail and just about every other industry. Yet their analysis is often completely at odds with the view from down in the trenches, a fact that causes a fundamental disconnect between commentator and audience.
Not mentioned either by the economists or the business pundits was that the latest retail data showed the Christmas season just gone was comfortably the worst of the entire decade for retailers. For the all-important December-January period, sales were up just 2.6 per cent on a year-over-year basis, less than half the decade average growth of 5.9 per cent for the two months.
For retailers selling only discretionary items, sales rose by just 1.7 per cent with retailers of household goods (-2.4 per cent) and department stores (-1.7 per cent) both posting declines. Small retailers gained just 0.3 per cent and independents in discretionary categories saw their sales decline by 4.6 per cent.
Why did the business economists not mention these facts? The answer is quite simply that they are not particularly interested; their concerns are not the same as professionals who work in the industry itself.
Specifically, macroeconomists like to spend their time looking for early warning signs of a change in economic trends, or “inflection points”. These are the precious jewels that enable an economist to transform what would otherwise be a deathly dull essay about “stability,” or “continuity,” into a triumphal announcement about an impending acceleration or deceleration in economic activity.
For this reason, they tend to focus on volatile seasonally adjusted monthly numbers. Serious academic economists deride this practice as “up-and-down economics,” because of its obsession with monthly gyrations in economic indicators.
Retailers and shopping centre professionals are primarily concerned with the overall health of their businesses and their industry. For them, it often makes more sense to see how far they have progressed since the same time a year ago without necessarily getting all hot and bothered about the monthly macro mood swings.
For example, if a retailer’s sales are healthy but tend to bounce around a bit from month to month, it isn’t much of a concern.
However, if that retailer’s sales decline or don’t keep up with inflation over the course of a year in which the population and incomes both show healthy growth, then it suggests a problem requiring a strategic response.
From the landlord’s perspective monthly data doesn’t matter either, since rents are typically set according to what has happened over the course of a year, not how sales have wiggled around for a few months.
For these reasons, if you are a small businessperson, most of what the economists say on the morning news doesn’t have a whole lot of relevance to you. Of course, you should be aware of potential shifts in economic activity, but running your business according to these is usually a big mistake.
In business and in life, it’s often better to ask yourself where you are now compared to where you were a year ago, rather than where you were a month ago.
Michael Baker is a global retail and property analyst and consultant. He is a former research director of the New York-based International Council of Shopping Centres. He can be contacted at Mbakerconsult@gmail.com or at www.mbaker-retail.com.
