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Reading Between the Lines of Rosy Economic Forecasts


Surveys got it wrong on the way down. Why would they be right on the way up?

Dr. Pangloss, the effervescent optimist in Voltaire's novel Candide, may have kindred spirits at the National Association for Business Economics.

The Washington, DC-based trade group representing about 1,500 businesses says greater numbers of US companies are reporting increased demand and higher profit, suggesting an end to the recession.

The NABE "net rising index" for demand climbed to 23 in the third quarter, the first time it had increased in five quarters. The index represents the percentage of respondents reporting an increase in demand minus the percentage reporting a decrease. The index stood at -5 in July. The current survey was completed October 1 through 12 and 78 NABE members responded.

But before popping the champagne, it's worth noting that this report reflects a very narrow sample. Taking NABE at its word that its members represent 1,500 companies and it received 78 responses, the survey sample represents only 5.2% of the membership.

Of those that responded, 73% (or 57 companies) expect the economy to expand by between 1% and 3% in 2010.

That's too narrow to support NABE's claim that the recession is easing, especially when there's no indication that the sample was selected at random or even that it includes key industries such as banking, retail, communications, transportation, energy, and advertising. In short, self-selected respondents may skew the results -- after all, who wants to report continued gloom?

In his autobiography, Mark Twain wrote: "Figures often beguile me, particularly when I have the arranging of them myself; in which case the remark attributed to (former British Prime Minister Benjamin) Disraeli would often apply with justice and force: 'There are three kinds of lies: lies, damned lies, and statistics.' "

Maybe, but it's easy enough to check what the National Association for Business Economics said last year as the economy soured.

In May 2008, the NABE said: "This is a very shallow downturn. In fact, only slightly more than half of our members believe it will ultimately be declared a recession. And, of those, the majority believe it will be over either this quarter or the next."

Oops! By some measures, the economy had slid into recession six months before NABE's Panglossian statement and the recession would be the deepest in about 70 years.
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