Monday, December 12, 2011

How do California's economic forecasters predict the state's future

World Economic outlook - How do California's economic forecasters predict the state's future : Every year, the California Department of Finance estimates how much tax money the state government is likely to collect. The projection is based on forecasts crafted by a small army of economists. This year, the revenue estimate will decide whether the state pulls the trigger on automatic cuts to public schools and universities, and health and welfare programs. That estimate's coming Tuesday. How do the state’s economic forecasters do their work?

The state Department of Finance kicks off its annual forecast with a closed door meeting with leading economists from the public and private sector. It’s closed so that the experts can speak candidly. Four experts at the Department of Finance's economic outlook conference offered their takes on what's coming.

"The economy has had its up and down," state legislative analyst Mac Taylor said. "It’s actually a little bit worse." "You have an overall economic forecast of very little economic growth," Jerry Nickelsburg with UCLA's Anderson Forecast said.

"The turning points are clearly there," Chris Thornberg with Beacon Economics said. "If you pay attention to the turning points you realize that the economy is starting to pick up steam."

"It’s going to be a long haul," California's principal economist Dennis Meyers said, "but there is a recovery happening."

It’s Meyers' job to build California’s economic forecast. "It is sort of a time-consuming, analytical process," Meyers said. "You can’t sort of pick up in the middle of the process and go ‘Oh, here’s what the answer’s going to be.’ It’s like a puzzle where you really can’t get the whole picture until you put the last piece in."

Think of the economic forecast as the base coat of the state budget. It’s underneath the revenue forecast that will determine the projected budget deficit or surplus — that will determine the political landscape for the coming year. It’s important to get it right, and it’s difficult to do.

"The California economy is many economies," said Nickelsburg. "It’s inextricably connected with what goes on in the rest of the U.S." Nickelsburg keeps tabs on the diverse industries that drive the state’s economy for UCLA's Anderson Forecast, from education to manufacturing to technology.

"No one industry dominates the whole of California," Nickelsburg said.

Economists try to measure known risks. They know, for example, that California is the U.S. gateway for Asian imports. So consumer spending in the rest of the nation has an effect on businesses here that transport Asian goods. But economists also try to measure the economic impact of unexpected events — like the Japan earthquake and tsunami.

Legislative analyst Taylor says forecasting what the economy will do is easy. "Translating your projections of what you think the economy’s going to do, and how that translates into actual sales tax, personal income tax, corporate tax revenue, is a totally different process."

Taylor says the state’s main revenue sources — the personal income tax and the capital gains tax — complicate the process. "One thing people don’t understand is that when we do a forecast of revenues — let’s say it’s $86 billion for the coming year — I don’t think they realize how much uncertainty surrounds that number," Taylor said. "It could easily be billions of dollars below that or billions of dollars above that. And you’re just trying to give your best shot, you’re trying to get as close as you can."

Last month, the legislative analyst predicted revenue will fall nearly $4 billion of projections. But Taylor says he won’t be surprised if the Department of Finance draws a different conclusion. Thornberg of Beacon Economics thinks state economists are too pessimistic, and he told them so at the Department of Finance conference in November.

"You know that person who walks in the elevator and as opposed to turning around and staring at the door instead stands in front and stares at everybody and everybody gets really uncomfortable because you’re breaking the social norm?" Thornberg said. "That’s me at this meeting!"

Thornberg says the other economists at the meeting put too much stock in last year’s revenues. He says more important indicators point to better days.

The Department of Finance has one piece of information the legislative analyst didn’t: preliminary tax collections reports for 2011. source

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