Economists gauge recovery with finger in wind

You don’t need an economist to know which way the wind blows; a weatherman might do just as well.

Economic forecasting, never a precise science, can be devilishly difficult, particularly when the economy arrives at a turning point.

“Economists never professed to be precise forecasters,” said Peter Morici, a business professor at the University of Maryland who warned about the housing bubble long before it burst. “People ask us, so we forecast. But it’s not a physical science.”

Reaction from Wall Street can compound the problem. The stock market recently has been buffeted by hopes that the economy is climbing out of a hole - or by fears that it is falling back into one, depending on the news of the day.

On Oct. 1, the day after the Dow Jones Industrial Average recorded its best quarterly performance since 1998 and its biggest third-quarter jump since 1939, the Bureau of Labor Statistics reported at 8:30 a.m. that first-time claims for jobless benefits increased during the previous week by 17,000, more than economists expected.

That disappointed investors, who promptly hit the sell button when the stock market opened an hour later.

By 10 a.m., the Institute for Supply Management (ISM) reported that the nation’s struggling manufacturing sector expanded for the second month in a row in September. Economists had expected the pace of expansion to accelerate, but in fact it eased a bit, further disappointing investors.

The rout was on. Not even August’s biggest monthly jump in consumer spending in nearly eight years, which the Commerce Department announced that morning, could take the sting off the unexpected blows on jobless claims and manufacturing. The Dow ended the day down 203 points; all 30 companies in the index retreated.

Exceeding the expectations of economists can move markets the other way as well.

On Oct. 5, the ISM reported that the nation’s service sector expanded in September for the first time in more than a year. The group’s index of non-manufacturing activity jumped from 48.4 in August to 50.9, significantly beating the expectations of 70 economists polled by Bloomberg News.

The subsequent market rally lifted the Dow to a 112-point gain by the closing bell.

Forecasting becomes especially challenging at the economy’s turning point. “It’s one thing to say there is a housing bubble, quite another to say when it will burst,” Mr. Morici said.

Economists have widespread agreement on this point, if nothing else.

“When we approach the turning point in a business cycle, we face the greatest amount of confusion,” said Bernard Baumohl, chief global economist for the Economic Outlook Group.

When the economy is in recession, most indicators point to contraction. When the economy is growing, the indicators point to expansion.

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