The Mystery of the Awful Economists

"We have 2 classes of forecasters: Those who don't know... and those who don't know they don't know."
-- John Kenneth Galbraith

A savvy speculator could have made a fortune lately betting on the outcome of the nonfarm payroll report. In the past year, taking "the under" of economists' consensus view has been money 87% of the time.

Given the recent upward revision to fourth-quarter GDP, perhaps Friday's February employment data will be the economists' best shot for "the over" in a long while. Regardless of how the dismal scientists do this month -- the consensus is for 225,000 -- the issue remains that they have been continuously wrong in both quantity and velocity this entire recovery.

Nonfarm Payrolls, Post Recession: 2001-05 vs. Average Recovery

Source: Federal Reserve Bank of Cleveland (Caveat Forecaster, February 2005)

Those of us who work in glass houses -- strategists, economists and meteorologists -- ought to be careful about throwing stones. But clearly, something is amiss and we should be asking ourselves why this recovery is generating such weak job creation and correspondingly bad forecasts. Has something changed structurally? Are some basic assumptions about the business cycle flawed? Perhaps econometric models are missing or overweighting a key factor. Indeed, something has caused nearly the entire field of economists to be persistently wrong.

I have considered -- and disposed of -- myriad excuses proffered: The disproved claims of the BLS Payroll Survey undercounting jobs vs. their Household Survey; the uncounted "self-employed, work-at-home-independent contractor;" that the Bureau of Labor Statistics data is somehow bad; the rationale that (somehow) eBay (EBAY - commentary - Cramer's Take) is the explanation for 7 million missing jobs.

As a person "unburdened" by a classical economics education, I am free to ask the questions most economists can't. I have my suspects in the mystery of the awful payroll forecasts. Among the most likely factors contributing to forecasting errors, outsourcing and productivity have been pretty thoroughly reviewed by economists; so neither of those issues is likely the cause.

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Barry Ritholtz is chief market strategist for Maxim Group, where his research and market analysis are used by the firm's portfolio managers and clients in the U.S., Europe and Japan. He also publishes The Big Picture, his macro perspectives on the economy and geopolitics, entertainment and technology industries, and is a member of the board of directors of Burst.com, a streaming media software company. At the time of publication, Ritholtz had no position in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Ritholtz appreciates your feedback and invites you to send it to [e-mail].