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Hicks: Worries abound during forecasting season

November 29, 2014

Mike HicksThis is the economic forecasting season as state governments begin to prepare fiscal year budgets (biennium budgets for 19 states). Most of these forecasts suggest faster gross domestic product and job growth. If everything goes as forecasted, 2015 will be the best year of economic performance since 2007. This is a low bar if ever there were one.

Still, no economist I know is pleased. In 2014, the U.S. economy has grown 2 percent. At this rate, standards of living in America will double in about 80 years—far beneath the average post-World War II rate of 3.4 percent. It is also well beneath the growth we should be seeing at this point in a recovery.

The most important part of economic forecasting is constructing a good model. I note with transient glee that my model predicted 2-percent growth for the U.S economy in 2014.

But it is also important to look past the model in trying to understand what might be materializing on the horizon. This is especially true because human intervention in the economy is a political process that will weigh more heavily on decisions than an economic model’s forecast.

For 2015, we should be very worried about the things our model does not see.

First, Europe is troubled in many ways. Both NATO and Russia are preparing for a widening war involving Ukraine and Baltic states. Sanctions on Russia are slowing economic growth in the continent. This will get worse—perhaps catastrophic—before it gets better, and several analysts believe the richest European countries have already entered a recession.

Japan has entered its third major recession since 2008. The extreme stimulus known as Abe-nomics (named after the prime minister) has failed an economy that has been stagnant since the late 1980s.

China is stumbling. Its three-decade growth miracle has almost entirely involved forcing subsistence farmers into 19th-century factories. Incredibly, they are running out of peasants while quite predictably have yet to find the miracle growth sauce that only free-market economies possess. They will emerge more like Cuba than South Korea, which means the Chinese consumer will not be buying large this year.

The data used in our forecasting models doesn’t yet capture these worries, but we can see them plain and stark before us. The very best we can hope for is that the models are right, and that the alarm bells sounding over the world economy are just a fire drill. The worst of these offer us a very bleak year.•

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Hicks is the George and Frances Ball distinguished professor of economics and director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.

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