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AFP Conference Preview: Zachary Karabell on Economic Indicators

  • By Andrew Deichler
  • Published: 7/9/2014
Attendees of the FP&A Luncheon at the upcoming 2014 AFP Annual Conference in November will hear from Dr. Zachary Karabell, one of the leading voices on the global economy and international relations. A Harvard Ph.D. and prolific author, Karabell’s most recent book, “The Leading Indicators: A Short History of the Numbers That Rule Our World,” looks at why numbers like GDP, inflation and unemployment are no longer adequate indicators of the economy. Instead, Karabell argues, there are other sources available to all of us that can better inform our decision making.

AFP recently spoke with Karabell about those indicators.

AFP: You argue that GDP, inflation and unemployment are outdated methods to measure current economic performance. What are some indicators that better suit today’s world?

Dr. Zachary Karabell:
I made an argument in the book that the search for the perfect, simple number to describe complicated systems is part of the problem. We’re not going to come up with a substitute or simple number. It would just be wrong for different reasons. The idea that a complicated system like the U.S. economy could be captured by one small number is part of the issue. Maybe Singapore could be, but not a more diverse and disparate system. The economic reality in Nevada is not the same as it is in New York or New Orleans. So if you just took the average of all three places and came up with one number, it would be statistically correct but it wouldn’t really illuminate what people’s experience is in life, jobs or output.

Part of what I’m arguing is that all these numbers treat the economy as a pretty unitary system, where everything is pretty much the same within it. And we know that’s not true. We’re certainly aware of it intuitively. But these numbers don’t allow us to have that granularity; they were never designed to. So I think it’s more about learning to be more modest in how we use the numbers we have and be more creative in finding information we need for the questions we have.

AFP: Would you say this is why the U.S. GDP—which was recently revealed as having contracted 0.1 percent in the first quarter of 2014—was shrugged off by the markets? Are they catching on that this indicator doesn’t really tell us very much?

That was a second revision and there will be a third revision. The number was probably affected by the severe winter; there were a lot of lost work days and lost economic activity. But there’s definitely greater awareness that these numbers continue to be revised after the first reading. We’re not that good with the job numbers. If the job numbers three months ago get revised by tens of thousands of jobs, which happens regularly, the headline doesn’t read “Jobs Three Months Ago Were Better than We Thought.” We just look at the first reading.

But I think people are becoming more aware of what the limitations are and are learning not to make such overwhelming conclusions over provisional and somewhat limited data.

AFP: Should we be focused on improving those processes? Should we be working harder to try and get those numbers right the first time?

There’s not yet a way to do that in real time. There have been some attempts to use information technology to come up with a real-time gauge of prices on the internet, which you can do more rapidly than relying on surveys, which is what the Bureau of Labor Statistics and other equivalent statistical agencies do around the world. You can use technology to come up with more immediate data about things like prices and job claims. But it’s going to be decades before everything is automated enough that you can come up with output in real time. And even then, you’d have to classify it and gauge it.

To be fair, the people responsible for creating these numbers, whether they’re public or private, are working very hard to come up with more accurate numbers. But most of these numbers were invented in the 1930s, 1940s and 1950s, when economic systems were mostly industrial nation states making products. I’m just saying that these numbers are what they are.

AFP: Given the way that you typically view this data, how would you say the U.S. and global economies are really doing? How is business doing? Is this recovery better or worse than it appears?

It depends on where you are on the economic spectrum, and to some degree on the geographic spectrum. Large companies have been doing substantially better than national economies. That’s because they can tap into the best of global growth—the emerging middle class, the relative affluence of the United States and European Union—and they don’t bear any of the real costs of being a nation or a human being. They don’t have to deal with education, healthcare, infrastructure and national defense.

Large companies are doing extraordinarily well; much better than the overall economy. Small businesses are more like individuals so some are doing well and some are struggling mightily. I don’t think there’s a one-size-fits-all generalization. It’s clear that what we call the emerging markets—China, India, Brazil, Indonesia—are year-over-year doing better than they were before. But it’s like that there too. If you’re a middle class resident of Mumbai, in many ways your life is improving. If you’re a poor farmer in a northern Indian province, it’s not. But on the whole, those economies are seeing massive increases in their standards of living.

If you’re American, European or Japanese, you’re seeing a plateau in your standard of living unless you’re connected to higher-end business and services. How do you break that down? There are 320 million people in the United States, and there might be 100 million people doing spectacularly well, and 1 million people doing phenomenally well. Then you’ll have 100 million people struggling. And that will all come out as an average of $39,000 per year income or 2 percent GDP growth. But those numbers mask the massive variation.

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