Tuesday, December 2, 2014

Data in Economics

Economic indicators are useful and reliable for predicting the future state of the economy as long as they have been collected long enough with the same methodology. At that point, it is possible for economists to look at the overall trend of the indicator and then to look at the pattern in the past. For example, Figure 4 is the four-week moving average for jobless claims.
Figure 4

There is a lot of useful information to be gleaned from figure four. Looking at the current state of the jobless claims, it looks as if the state of the economy is strong. People are not losing their jobs at a rate that existed in recent memory. The problem is that the past does not necessarily reflect the future. The current trend is down, which in isolation is good. However, looking at the graph shows that the current level is also near the lowest jobless claims have come since the early seventies. The question then is if the localized trend is the prevailing trend, and the jobless claims will keep going down, or is the larger cyclical trend the stronger part of the equation, where the current economy is at its localized peak. If the short-term trend prevails, then businesses can use that information and invest because the economy is only getting stronger. If the long-term trend prevails and the economy is at a natural low, then it is time to retrench because jobless claims will go up, then unemployment will increase, and then GDP will shrink.
            The jobless claims are just one indicator. By having more information, and having more indicators, then an economist can look at all of the information and discern the larger patterns and even fit the current information to which past economic situations were more like the current one. Total information awareness can only help professionals use this data and harness the predictive force of the economic indicators. Of course, even with all the information and all the historical examples, even the best-trained scientist can be wrong but overall tracking this various data has been smart for the country and has helped the government and the central bank make good decisions by moderating the business cycle. Modern macroeconomics was born of the great depression, and so far has prevented another one from happening. It would not have been possible without good data.