The Biggest Secret of Economic Indicators

The biggest secret of economic indicators is how to profit by using them. In fact, it's so secret that economists and journalists who write about economic indicators don't tell it to their readers.

This was brought to mind when I saw that Tyler Cowen just linked to a book review of The Secrets of Economic Indicators by Bernard Baumohl.

Although I have not read this book (yet), over the past 6 months I have read a half dozen books about economic indicators, all of which claim that economic data are essential for proper decision-making in the short-run and long-run, and none of which tell the reader how he can use the data profitably.

This book might be different, though I'll reprint an excerpt from the review that leads me to a pessimistic outlook:

But why should anyone other than Alan Greenspan care about economic indicators? "Because these are vital barometers that tell us what the economy is up to and, more importantly, in what direction it is likely to go in the future," Baumohl says. He characterizes them as essential knowledge for investors worried about their portfolios, company chief executives trying to make business decisions they can justify to shareholders, and workers just trying to gauge the health of their industry.
I like the idea of continual interaction between people and data: in one period, everybody's economic activities are recorded, and in the next period, their economic activities are based on knowledge of everyone's past activities as well as future plans. I just don't know how much an improvement would occur if people dropped their apparently puerile attachments to making decisions without reviewing macroeconomic data. As Richard Wagner impressed upon me, just how did smart people make smart decisions before such data were available?

In other words, what is the potential value added of these data--in billions of dollars--if everyone knew their secrets? Is there evidence that macro data have increased macroeconomic coordination, and hence GDP? How much can we gain through the persistent devout following of data releases? I have not seen one good answer to these questions! Perhaps this is all a large waste of time? Given the data, how likely are we to guess CORRECTLY the direction of the economy? Without the data, how likely are we to guess correctly? If I were working with Vernon Smith and the experimental economists at GMU, I would suggest that a large-scale economic experiment be conducted in order to measure how valuable macro data like "retail sales" and "initial unemployment claims" is to micro agents.

All macroeconomic data are vestiges the past, some of a week ago, many from last month, a few from last quarter or last year. If the data indicate small changes have occurred, you need a subtle theory and a calculator to make a conclusion about the likely direction of the economy in the future. If the data indicate large changes have occurred, I think hope most people in an industry will already have spotted the difference in activity and have adjusted...

My advice: you should follow economic indicators if 1) you know how to profit off using them more than you could profit doing something else with your time, or 2) you genuinely enjoy messing around with economic data--making forecasts, and pretending your forecasts are accurate, or 3) you like following the politics of economic data, or 4) just doing something to manage your portfolio makes you feel better.

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This page contains a single entry by Kevin published on January 25, 2005 10:32 AM.

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Quick Book Review: The First 40 Pages of The Secrets of Economic Indicators by Bernard Baumohl is the next entry in this blog.

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