Is the economic consensus useful anymore?

Posted by: Paul Donovan

15 May 2020

Weekly Update

  • Economics is not precise. While the media demand the precision of decimal points, economics is mainly about identifying trends. The virus is making this all the more obvious.
  • This is not a normal downturn. This is a sudden policy-induced downturn—like turning off a light switch. Consumers and firms may react differently when the “light switch” is turned on again. The causes of this downturn are less complex than normal, and that may alter consumer uncertainty about the recovery. Normal economic models may not work.
  • In addition, economic data is largely nonsense in a lockdown. Data quality was getting worse before the virus. Now, no one is filling in survey forms. Economists are asked to forecast what statisticians guess is happening in the economy. It is possible that economists are right and statisticians are wrong.
  • This means a lack of precision, which makes an "economic consensus" a meaningless number. Forecasts for the US April unemployment rate ranged from 11.6% to 22.0%. The US December unemployment range was 3.4% to 3.7%. Estimates for second quarter Euro area GDP range from –1.6% y/y to –19.8% y/y. Describing a number as above or below consensus is not helpful. Economists—and markets—cannot be that precise about today's world.

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