Tuesday, April 30, 2013

30/4/2013: Business Confidence... not exactly an unbiased metric of reality


Readers of this blog would know that I have always been skeptical about 'business confidence' and 'consumer confidence' surveys as indicators of true underlying activity or predictors of the future activity. In the past I have criticised the German Ifo data on business expectations (http://trueeconomics.blogspot.ie/2013/02/22022013-small-cloud-over-german.html) and Irish consumer confidence indicators (http://trueeconomics.blogspot.ie/2013/04/2642013-another-indicator-turns-south.html) as being somewhat systemically biased into the la-la land. I even lost Sunday Tribune column back in 2007 on foot of criticising one of Ireland's largest real estate brokers' research on similar methodological basis.

Now, behold research from NBER, titled "Firms’ Optimism and Pessimism"  
(NBER Working Paper No. w18989) by RUDI BACHMANN, STEFFEN ELSTNER and (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2257179) which looks at whether in general, firms’ expectations can be systematically too optimistic or too pessimistic. The authors used "micro data from the West German manufacturing subset of the IFO Business Climate Survey to infer quarterly production changes at the firm level and combine them with production expectations over a quarterly horizon in the same survey to construct series of quantitative firm-specific expectation errors."

The authors found that "depending on the details of the empirical strategy at least 6 percent and at most 34 percent of firms systematically over- or underpredict their one-quarter-ahead upcoming production. In a simple neoclassical heterogeneous-firm model these expectational biases lead to factor misallocations that cause welfare losses which in the worst case are comparable to conventional estimates of the welfare costs of business cycles fluctuations. In more conservative calibrations the welfare losses are even smaller."

Ouch… the confidence fairy might not only be a lier, but biased lier on top of that…

2 comments:

Bunbury said...

Hi Dr G,
I didn't know you had a column pulled in the ST. My modest claim to fame is that I had a post on Irisheconomy.ie pulled by Philip Lane as it described factually Arthur Cox's lucrative legal services contract with the HSE. This comment was posted last week in Prof Tol's post on the MO'L interview in a Dutch newspaper. Interestingly, Prof. Lane did not dare pull Sarah Carey's much more damning comments about Arthur Cox in the same post. Subsequent posters refer to my missing comments.

TrueEconomics said...

I write for Sunday Times only when Damien is away, so not a regular place, quasi-regular of sorts. Damien is a very good commentator, so it is an honour to stand in for him on occasion.

It was Sunday Tribune column that was axed ages ago - I dared to criticise 'research' from one of the big sellers of apartments. Did so in passim. Was thrown out came next Monday on orders of MD, not even editor. In fact, editor of the paper pretended she knew nothing (may be she didn't, which goes miles to point what editorial management integrity the paper really had). Business editor at the time defended me and lost. He was fired from the paper criticising the same apartments peddler just a couple of months after me.

Funny thing - I was not allowed to post on IrishBoredonomy.something early on and have not tried ever since. Always prefer my own path. That said, there are good people writing there, e.g. Kevin O'Rourke and others.