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If properly diversified, your asset allocation mix will also be in position to reap the benefits of the inevitable recovery

By Marc Davis

When hard times hit, a well-diversified allocation of assets and the
patience to stick with it no matter what the market does is the best
defense against portfolio meltdown.

If properly diversified, your asset allocation mix will also be in
position to reap the benefits of the inevitable recovery.

This is the unanimous advice of the four veteran financial advisors
interviewed for this article, and independent studies over the decades
show that this approach almost invariably works.

Asset allocation is the term used to describe the percentage of your
investment portfolio invested in each of the four major categories of
assets. These are stocks and or mutual funds, bonds and or fixed income
instruments, commodities, and real estate.

There are also additional categories of investments, called alternative
assets, which some of the financial advisors we interviewed recommended
for special circumstances, such as a recession.

Even with a judiciously and widely diversified asset allocation mix,
when markets start to slump and portfolio value begins to evaporate,
urge among investors to sell increases in direct proportion to the
portfolio’s decline.

But selling into a down market is a formula for financial disaster, say
the experts.

“Buying and selling investments in a panic as the market stumbles and
falls is the biggest mistake investors can make,” says Jerry Miccolis,
CFA, CFP, FCAS, MAAA, senior financial advisor and co-owner, Brinton
Eaton Wealth Advisors.

“Changing your asset allocation [percentages] during an economic
downturn is not the right move,” says Miccolis, who is also the
co-author with Dorianne R. Perrucci of “Asset Allocation for Dummies,”
published by Wiley Publishing, Inc.

“Selling is exactly the wrong thing to do at the wrong time,” he says.
“You’ll probably sell investments that went down, and buy equities or
other investments that went up. This is the exact opposite way to
accumulate wealth.”

Accumulating wealth is a matter of buying low and selling high, not the
other way around, which is what panicked investors are likely to do in
recession, Miccolis points out.

Your asset allocation mix should be in place before a recession, during
a recession, and in some instances, after a recession, if rebalancing
not required, say the experts. Changing your asset allocation mix in
response to volatile and ever-fluctuating markets in a recession can
cost you money.

Changing your asset allocation mix implies investing an increased
percentage of your portfolio in one or more categories, and a
corresponding reduction of percentage of investment in others. For
example, shifting from a 60 percent investment in fixed income
investments – a typically conservative allocation for retirees – to
a 75 percent allocation to fixed income.

A rebalancing of assets is a different procedure with the goal of
bringing a portfolio which may have become over-weighted in some
categories and under-weighted in others due to market changes back to
its original percentage mix. This is accomplished through the buying
selling of assets which restore the desired percentages.

Does changing and or rebalancing your portfolio make sense in a
recession? Only if you have a crystal ball, according to Miccolis.

“There’s no special defensive asset allocation mix for a recession,”
Miccolis says. “The patience to ride out the downturn is probably your
best defense.”

Harold Evensky, CFP, and President of Evensky & Katz, Coral Gables,


“How can you protect yourself in a recession?” Asks Evensky

“Only if you know what the problems are going to be,” he answers

“Few people knew what the recent recession was going to look like, and
they wont know next time, either,” Evensky says.

“But the world is global now, so 45 percent of our stock market
allocation is in foreign equities. We’d expect about the same return on
foreign equities as the domestic market.”

“Bonds are likely to do well in a recession,” he said. “We had some
foreign bonds in our fixed income allocations.”

Evensky agrees with the other experts interviewed for this article on
establishing an asset allocation plan and sticking to it.

“The only exception might be is when the stock market goes
substantially down,” he said. “That may be the time to increase your
stock holdings.”

Evensky recommends a quarterly portfolio review and advocates a
rebalancing at that point if market conditions warrant. If there are
major market changes, either up or down, Evensky says it’s time to

Evensky and Miccolis are also in agreement on the biggest mistake
investors can make in a recession – panic selling.

“Investors tend to buy stocks near the top of the market, and sell them
when the market is near the bottom,” says Evensky. “Selling equities in
a down-trending, recessionary market can be very damaging to a

Evensky’s forecast for the economy over the next ten years may help
investors decide on their asset allocation mix.

“I expect only modest increases in the GDP over the next decade,” he
says. “Stocks will probably return nine to ten percent annually. The
most important thing for investors to do is control taxes and

Kris Johnson, a CFP, with Timothy Financial of Wheaton and Chicago,
Illinois, has a somewhat different outlook on asset allocation in a

“You can only tell what the best asset allocation mix for a recession
by looking backward,” says Johnson.

“There’s just a few things you can do. In 2008, even bonds took a hit.
If you were in cash and Treasuries, that was good. Some instruments
less than others. But it’s impossible to foresee a recession. In an
inflationary environment even Treasuries wont save you.”

The problem of portfolio protection is compounded by the unique
characteristics of each recession.

“Each recession is different, but in the last recession more
conservative investors who were in some mix of cash and government and
corporate bonds did better,” says Johnson. “This specific mix would’ve
certainly been safer than stocks.”

Still, preserving capital and making money was all but impossible in
the most recent downturn, according to Johnson.

“But some investments in alternative asset classes performed better
than other markets,” he says. Alternative asset classes include managed
futures funds, merger arbitrage funds, real estate, and other types of
investments that have either low correlation to stock and bond markets,
lower volatility than stock markets, or both.

Johnson recommends 20 percent of a client’s portfolio be allocated
among these various alternative assets including managed futures funds,
merger arbitrage funds, real estate investments, and other types of
investments that have either low correlation to stock and bond markets,
lower volatility than stock markets, or both.

Allocation of that 20 percent is discretionary and dependent upon
specific conditions and opportunities in each of these markets, and on
each client’s situation and goals. Generally, although percentages can
vary, Johnson recommends that each allocation in the sub categories of
alternative assets range from three to six percent of the total

In one allocation of the 20 percent, Johnson invests half in managed
commodity futures and half in interest rate instruments, such as T-Bill
rates, or foreign currencies, such as the Euro. Depending on market
situations, long or short positions in these rate-dependent instruments
may be appropriate. Most investors in commodities lost money in the

Although managed futures funds are considered risky by many experts,
Johnson finds them appealing because they don’t move in tandem with the
stock and bond markets.

A merger arbitrage fund looks for potential corporate mergers, buys
shares in the targeted company, and sells shares in company seeking the
merger. The profits are earned in the spread, or the difference in the
buy-sell price.

“A merger arbitrage fund is relatively safe, if due diligence is done,”
says Johnson. “And there’s less volatility and risk because of their
correlation to the stock and bond markets. In 2008, they held up better
than other investments.”

But again, the consensus among experts is that asset allocation should
remain a relatively stable investment mix and change only as an
investor’s needs and goals change, and in response to significant

“Since we can’t accurately predict when a recession will hit, we put
together an asset allocation program for investors over the investor
lifetime that depends on the client’s goals,” says Johnson. “Depending
on the client, we rebalance the portfolio every six months or a year.
It’s done unemotionally, systematically and with discipline.”

Major market moves, however, may require rebalancing.

“If there’s a 30 percent move in the S & P, we’d rebalance a portfolio

Remember, rebalancing asset allocation is not the same as changing
asset allocation.

Miccolis, Evensky and Johnson all agree that as a general rule, you
should stay with your asset allocation mix, good times or bad.

To determine the best mix, investors should ask themselves a number of
questions, say our experts.

These include:

Do you want your investments as a retirement nest egg? For paying
bills? For supporting a certain level of life style?

How old are you?

How many years away from retirement are you?

Are you retired now?

Are you a conservative or more aggressive investor?

In an even more personal approach to formulating an asset allocation
mix, Betty Fox, a CLU and ChFC, based in Las Vegas, Nevada, asks each
client the following:

How much money do you want at retirement or any given time in the

Will you distribute this money to others?

Will others inherit your assets if you predecease them?

How much risk are you willing to take?

Can you lose money and still sustain your goals?

Can you get out of a position when you’re making a profit?

Do you have the strength to cut a loss?

Can you resist mainstream investment hype and financial advice if it’s
not in your plan?

Can your heirs understand and benefit from your investments?

Can you sleep with your investment decisions?”

Once these questions are answered, Fox designs an asset allocation mix
customized to each client. She insists, however, that her clients
understand their investments, and know how they work.

Fox, like the other experts, says “A broadly diversified portfolio
works good times or bad.”

Bear markets, however, are inevitable, say the experts. “You can expect
a bear market every five years or so,” says Miccolis. “In October,
nothing did well in the market. Nevertheless, it’s extremely rare for
all four categories to decline at once.”

Along with this mix, Fox recommends annuities as well.

“Some annuities with guaranteed returns and a floor on losses did well
during the recession,” she says. “These were based on a diverse
investment mix and didn’t lose a penny of principal during the
Some were also structured to capture the upward movement of the

Annuity yields vary depending on the specific plan and the underlying
investments, but Fox points out that there are also tax advantages in
annuities that are not available in many other investments.

Municipal bonds, also in the fixed income category, may also be a good
hedge, depending on the issuer, according to some experts. Municipal
bonds also have built-in tax advantages and in some cases may be

Generally speaking, for a conservative investor, Miccolis recommends an
investment of somewhat less than 50 percent of assets in equities.

“For the _very_ conservative investor, one third or less may be
appropriate; whatever the investor is comfortable with. Then a 30
percent investment in the bond category, and ten percent each in real
estate and commodities.”

Bear markets, however, are inevitable, say veteran market observers.
“You can expect a bear market every five years or so,” says Miccolis.
“In October, 2008, nothing did well in the market. Nevertheless, it’s
extremely rare for all four categories to decline at once.”

Like Johnson, Miccolis points out that every recession is different,
and so protecting specific assets is difficult.

“In the recent downturn the banking sector led the decline,” says
Miccolis. “Banking, however, doesn’t always lead a market decline. Most
commodities declined in value, but gold went up.”

All our interviewees agree, as do most other financial advisors, that
there’s no perfect portfolio. In a recession, investors must be
for the inevitable temporary losses and ride out the down turn. Resist
the urge to sell. There will be a recovery, sooner or later.


Although cash may be scarce, and revenues down, small businesses should
not neglect their insurance needs.

Businesses which are underinsured or without broad, proper and adequate
coverage, are taking needless risks which could eventuate in serious
financial problems, including potential bankruptcy.

In extreme cases, a business without insurance or which is
underinsured can be totally destroyed by some crisis.

Business owners must be thoroughly informed on what their insurance
policies cover and what is excluded. A periodic review of insurance,
therefore, is an absolute necessity, along with updates and adjustments
in coverage as circumstances change.

Countless owners of small businesses were underinsured, or carried no
insurance at all, for natural disasters such as hurricanes and flooding
and were severely hurt in the wake of tropical storms which ravaged New
Orleans, Galveston, Houston, and other hard hit areas.

Many of these owners were either unaware that their companies were not
covered by insurance, or decided not to buy storm damage coverage
because of a scarcity of cash. A number of owners were shocked to learn
when their insurance claims were denied that they were not covered for
the damages they reported.

Another insurance issue which requires the vigilance of small business
owners is the expiration date of their policies. In most cases, the
insurance company, agent or broker from whom a business owner bought
or her policies will inform them when their policies are about to lapse
or need to be renewed.

But the prudent owner should rely only on himself to know well in
advance when a policy is about to expire and then renew it in a timely
manner so that there is no gap in coverage, and no disappointment if
when claims are filed.

Insurance products are contractual arrangements between the insured and
the insurer. The contract spells out what is insured, the cost of the
insurance, the conditions under which a claim may be made, and the
of payment if the claim is honored.

There are a wide variety of insurance categories and degrees of
coverage that both the start-up business owner, and the owner of a
business should investigate.

Premiums and deductibles vary in price. An insurance deductible is the
amount of money the insured must pay toward a claim before the
company pays on the claim. Usually, the higher the deductible, the
the premium — the cost of buying and maintaining the policy in force.

Premiums may be paid in a variety of ways, including, most usually,
annually, quarterly or monthly.

A business owner’s insurance policy offers broad spectrum protection
against financial loss resulting from damage to the owner’s property.
The damage may result from fire, flooding, and other disasters. The
policy will spell out what is covered.

The business owner’s policy can also cover the legal liability of the
owner for any bodily injury suffered in any occurrence related to the

An “all-risk” policy in which comprehensive coverage is offered, is
preferable to a “named-peril” policy in which specific risks are

In an all-risk policy, every eventuality is covered, except for
specifically cited exclusions. The all-risk policy minimizes the
possibility that some problem wont be covered, and also minimize the
possibility of overlapping and unnecessary coverage.

Among the risks that may be covered in a business owner’s policy are:



Other Sources of Property Damage


Bodily Injury

Business Interruption for Specified Reasons, with exceptions specified.

Product Liability. This type of insurance, which may be obtained at
additional cost, may be a necessity if you sell a product that has the
potential for injuring a user. Even if you did not design, manufacture
or distribute the product, if you sell it and it injures a user, you
have legal liability which should be covered.

A commercial insurance policy mat be required if your business is
larger and more complex than a simple single-owner or partnership
retail operation, or a service-oriented business, or a professional
practice of some kind. A professional practice may require malpractice
insurance. (See below).

Businesses that may require a commercial insurance policy include
manufacturing, restaurants, commercial real estate, and others which
vary from company to company. A commercial policy is typically more
expensive than a business owner’s policy, but the risks are
correspondingly higher and potentially more costly to the underwriter,
the insurance company which issues the policy.

Professions such as medicine, dentistry, law, accounting, advertising
agencies, financial planners, occupational therapists, computer
analysts, journalists, real estate brokers, and other similar
occupations which give advice and provide services to consumers in
errors of commission or omission may eventuate in substantial
may require professional malpractice insurance.

Premiums are calculated on actuarial data for risk, dollar damages and
other factors and vary widely depending on the profession and it’s

Neurosurgery – brain surgery – for example, is a profession that
carries a high premium for malpractice insurance. Coverage for a
single-owner, private practice accountancy would normally carry a
smaller premium.

Coverage for low-cost legal representation is another option offered by
insurance firms.

A professional of any specialty who practices without error or omission
may still be the target of a malpractice suit, even if the claim is
without merit.

As a complement to business owner’s insurance, a comprehensive home
owner’s policy is also a necessity, both for home-based businesses and
for other business entities such as partnerships and corporations that
are not operated from a private residence.

Home owner’s insurance will protect a residence from non-business
related injuries or other legal liability. Because a business and the
personal assets of a business owner are connected, the home owner’s
residential insurance coverage is a necessity.

Comprehensive coverage is the policy most frequently written for home
owners, often referred to in the insurance business as “HO-3.”

Usual coverage includes home or personal property damage caused by
fire; storms, including lightning and wind; medical costs of occupants
injuries caused by fire, storms, wind, and lightning; medical and legal
expenses of persons accidentally injured in the insured home; loss or
theft of specified personal property, either in or away from the
home. Some policies covering loss or theft may exclude certain
properties such as art, antiques, collectibles, jewelry and laptop
computers. Items such as these may require special coverage.

An important risk not covered in a homeowner’s policy are claims
related to a business conducted in the residence. A customer or client
who comes to your home, or a business vendor making a delivery, may be
injured on your premises and the claim arising from that injury would
not be covered.

Under certain circumstances a home-operated business in which risks are
minimum, a low-cost rider to your home owner’s policy may be added
covers the business.

Such a rider may not added, however, if employees, customers or clients
come to your home-based business; if costly equipment or inventory are
used, or stored, on the premises; if hazardous or combustible materials
are used or stored on the premises.

The dollar amount of coverage for property damage or loss should be
consistent with the replacement cost of the properties covered,
including your home. Over-insurance in this area can be avoided, and is
a needless expense.

Liability insurance is more difficult to calculate because of the
intangible being insured. Minimum insurance requirements for a business
are often imposed by the state in which the business is located. Your
agent, or your state insurance commission, can provide these figures.

Some experts advise that a business

Discuss your insurance needs in detail with your insurance agent or
broker, and be completely forthcoming and candid in describing a
home-based business so that coverage is adequate. Make sure you
understand what is, and what is not, covered.

Shopping for competitive pricing is a good idea, especially in tough
economic times, when companies eager for your business are willing to
adjust their prices accordingly.

Be sure to include in your annual budgeting the cost of insurance.
Hopefully, you may never file a claim, or experience a claim against
or your business. But if and when either of these possibilities occur,
you’ll have adequate coverage.


Since its establishment in 1914 by President Woodrow Wilson, the
Federal Trade Commission (FTC) has been protecting consumers,
and businesses from anti-competitive practices such as monopolies,
monopolistic mergers, price-fixing, bid-rigging, fraudulent and or
deceptive advertising and unfounded product claims.

These important functions helps the U.S. economy run smoothly, safely
and fairly for business, consumer and investor.

The initial motivation for the creation and enactment into law of the
Federal Trade Commission was to re-enforce, regulate and clarify in
specific terms what the earlier Sherman Anti-Trust Laws and the Clayton
Act prohibited. Both laws prohibited business practices that would
or eliminate competition to the detriment of consumers, investors and
the economy in general.

Widespread public outrage over abuses of these laws, and ongoing
anti-competitive business practices in violation of the earlier laws
also impelled Wilson to take action against trusts and monopolies.

At first the FTC was charged with the responsibility of preventing or
dissolving monopolies, and to bring civil law suits against violators
the law. Monopolies, by their nature, are anti-competitive, and are
therefore injurious to consumer and investor interests, and to the
economy at large. A monopoly may dictate consumer prices, control
quality and distribution.

In the ensuing decades, as the American economy became more complex and
flourished through technological innovation, increased productivity and
personal income, the opening of an increasing number of profitable
foreign markets, the FTC likewise expanded and took on additional
functions and responsibilities.

Enforcement of Laws. The FTC has the power to bring civil suits in
federal court to secure financial compensation and penalties for
individuals or for class action litigants damaged by violators of
applicable laws. Fines and punishments against violators are imposed by
the courts, rather than directly by the FTC.

Investigatory. In response to complaints from consumers, businesses,
trade associations or other sources, or through evidence of misdeeds,
the FTC may investigate a business to determine the validity of a
or allegation, and recommend further action against the alleged
violator, if the evidence warrants, such as a court action. The FTC may
issue a “cease and desist” order against businesses found to be using
“unfair practices,” or in violation of other restrictive statutes.

Internet. Although through most of the 1990s, Internet commerce was not
covered by FTC regulations, data developed by the FTC in 2000 disclosed
a low 20 percent compliance with applicable laws among Internet-based
businesses. As Internet business expands and becomes a larger fraction
of the Gross Domestic Product, new FTC regulations are expected to be

Oversight and Monitoring. A critical function of the FTC is its
continual monitoring and oversight of the business community for
violations of the law and unfair practices. The Besides it
anti-competitive functions, the FTC also attempts to enforce
against false advertising and the full disclosure requirements in
various business transactions and activities – pricing, franchising,
advertising, among many others.

Fact Finding. In recent decades the fast-paced development of high-tech
applications in the business world – computers, the Internet,
e-commerce, cell phones, etc. – has necessitated a continual
for users of these devices, and for the FTC as well. With the
accumulation of facts and information on these technologies and the
business practices associated with them, the FTC is better equipped to
issue appropriate protective regulations.

The results of much FTC activity in the areas cited above have proved
beneficial to the public. A successful law suit brought by the FTC
against the tobacco industry stopped cigarette advertising targeting
adolescents and pre-teens.

Also falling under FTC scrutiny were the many mergers that were
consummated in recent decades, such as the Exxon-Mobil consolidation
the marriages of Boeing-McDonnell Douglas and American Online and Time
Warner. The FTC made sure there were no violations of anti-trust or
anti-monopoly violations in the mergers of these companies.

A commission of five supervisory members appointed by the President
administers the activities of the FTC. Each commission member serves a
seven year term, and must be approved by the Senate. A chairperson,
selected by the President, is empowered to appoint an executive
who acts as a chief operating officer. The commissioners must approve
the appointment.

The FTC is divided into three principal bureaus.

The Bureau of Consumer Protection protects consumers against deceptive
and or unfair business practices. Included under the FTC mandate are
deceptive advertising and fraudulent product and or service claims.

The Bureau of Competition investigates and attempts the prevention of
anticompetitive business practices such as monopolies, price fixing,
similar regulatory violations which may negatively affect commercial
competition. Criminal violations in these areas are handled by the
Antitrust Division of the U.S. Department of Justice, which cooperates
with the Bureau of Competition.

The Bureau of Economics works in accord with the Bureau of Competition
to study the economic effects of FTC lawmaking initiatives and of
existing law. In the matter of mergers and acquisitions in critical
industries, such as communications, for example, a merger which
eventuates in restraint of trade, or monopolistic pricing, can have a
major impact on the economy.

Acquiring more regulatory power over the years, the FTC entered a
period of aggressive prosecutions and sanctions in the early 1970s. By
the end of the decade, however, criticism of the FTC’s activism
increased in the business community and in the U.S. Congress. Among FTC
actions criticized was the commission’s issuance of regulations for the
influential petroleum industry, a major contributor to GDP and to tax

Critics in the late 1970s claimed the FTC had become too powerful, too
insensitive to the needs of business and the public, and operated
independently with little oversight from either Congress or the

Consequently, during the first term of President Ronald Reagan, the FTC
was made answerable to, and under the control of the President. A new
FTC attitude also emerged

in the ensuing years which was more cooperative with business
interests, without abandoning its protective functions. Eventually
becoming as important as its anti-competitive function, the monitoring
and enforcement of consumer fraud violations became a major activity of
the FTC.

The FTC provides important statutory safeguards to consumer, investor,
business and the economy in general. It also makes sure the regulations
are strictly complied with. At the same time, the FTC does not act as
obstacle to the conduct of business in the American free market. With
the FTC more flexible in its regulatory and enforcement functions,
business, investor, consumer and the economy all benefit and have the
potential to prosper.

END Submitted by Marc Davis

Celebrated playwright George Bernard Shaw once famously quipped, “You
could lay all the world’s economists end to end and never come to a

Why can two experienced, knowledgeable economists study and analyze the
same data and each come up with a different forecast for the nation’s
economy? Why do these experts so often disagree with one another?

There are several reasons for these differing opinions.

Probably the principle disagreement among economists is a matter of
economic philosophy. There are two major schools of economic thought:
Keynesian economics and free market or laissez faire economics.

Keynesian economists, named after John Maynard Keynes who first
formulated these ideas into an all-encompassing economic theory in the
1930s, believe that a well-functioning and flourishing economy may be
created with a combination of private sector and government help.

By government help, Keynes meant an active monetary and fiscal policy
– controlling the money supply, and adjusting Federal Reserve
rates in accord with changing economic conditions.

Other aspects of Keynes’ philosophy include an advocacy of government
spending to stimulate the economy, the setting of tax rates favorable
consumer spending, and other government initiatives to help the economy
grow, or to retrieve it from a recession, or depression.

Franklin D. Roosevelt, America’s president throughout the Great
Depression of the 1930s, implemented some of Keynes’ ideas, principally
government spending to stimulate the economy.

By contrast, the free market economists, alternately called laissez
faire economists, (French for “let do”) advocate a government “hands
off” policy, rejecting the theory that government intervention in the
economy is beneficial. Free market economists –and there are many
distinguished advocates of this theory including Nobel Prize winner
Milton Friedman – prefer to let the marketplace itself sort out any
economic problems that may occur. That would mean no government
bailouts, no government subsidies of business, no government spending
designed specifically to stimulate the economy, and no other efforts by
the government to help what the economists believe is the ability of a
free economy to regulate itself.

Both economic philosophies have merits, both have flaws. But these
strongly advocated and conflicting beliefs are a major cause of
disagreement among economists. Moreover, each philosophy colors the way
these warring economists see the economy, both the macro economy and
micro economy. As a consequence, their every pronouncement and economic
forecast is influenced in large measure by their respective
philosophical biases.

Besides their elementary philosophical differences disagreements among
economists arise because of a variety of other factors as well.

Let’s stipulate that economics is not an exact science, and often
unforeseen influences may occur to derail the most successful
of economic conditions. These would include, but are not limited to,
natural disasters – earthquakes, tsunamis, droughts, hurricanes, etc.
Also among the unforeseen events which can upset the most carefully
drawn economic forecast are wars, political upheavals, epidemics or
pandemics such as influenza, and similar isolated or widespread

Into every economic forecast, therefore, one must include an X-factor
in the equation – the unknown, and unpredictable.

When forecasting the future of the economy – short-term, mid-term and
long-term — economists may study some or all of the following data,
plus other data as well. Most economists have a personal preference for
which numbers are the most useful for forecasting the future.

Some of the data economists study and analyze are cited below. The
information is gleaned from both government and private sources.

Leading economic indicators

These include

Gross domestic product (GDP) Is it growing, shrinking? By what
percentage? Or is the GDP flat, or stagnant?

The inflation or deflation rate.

Employment numbers

Jobless numbers.

Trends, highs and lows, in the following stock market indexes

The Dow Jones Industrial Average

The Standard & Poor’s 500 Stock Index

The NASDAQ Composite Index

New home starts and sales.

Existing home sales.

Treasury interest rates

Fed interest rate.

Money supply


The price of the U.S. dollar against foreign currencies.

Borrowing and lending trends and interest rates on loans

Debt levels in various categories

Personal savings rate

Business and personal bankruptcy rates

The national debt

The Federal budget deficit

Commodity prices, future and spot market

Personal income – is it rising, falling, or remaining stable?

Industry sectors – automotive, energy, communications, manufacturing,
etc. – Economists examine them sector by sector to assess their
and future performance.

Mortgage defaults and delinquencies

Supply and demand of various consumer goods and services

Capital expenditures of businesses and industries

Consumer spending

Consumer debt.

And an unquantifiable element that economists nevertheless quantify and
assign an arbitrary number to: Consumer confidence

Business cycles – the fluctuating periods when the total production
of goods and services increase or decline – are also part of the mix.
The duration of these cycles are unpredictable but may be shortened by
the judicious use of government monetary and fiscal policy, say
Keynesian economists. Free market economists say the down cycle will
eventually resolve itself without government intervention.

Monetary and fiscal policies – the money supply and interest rates,
respectively — are an additional X-factor in the economic equation.
Because no one can predict with complete accuracy what the government
will do three months, six months, or a year or more into the future,
this fact further complicates economic forecasting and is often a
of disagreement among economists.

Assume now that three economists look at some or all of the above data
and make three different forecasts for the U.S. economy.

Economist A might say that the economy will grow in the next two fiscal

Economist B might say the economy will shrink in the next two fiscal

Economist C might say that the economy will remain flat for the ensuing
two quarters.

One or more factors might explain the differing opinions.

First among them is the unexpected. Some economists build an element of
the unexpected into their forecasting; others do not, or do not give it
enough weight in their equations. Therefore, disagreements large and
small occur.

For example, at the end of the second quarter, 2009, when many
economists said the economy was bottoming out and approaching a
recovery, some interesting economic phenomena occurred.

Personal spending increased, yet personal income declined by 1.3
percent, something unforeseen by most economists whose forecasts cited
median drop of 1 percent.

Despite this increase in personal spending, personal savings had also
increased, another phenomenon not foreseen by all economists.

According to the U.S. Commerce Department, factory orders increased in
June, 2009, by 0.4 percent. Many, but not all economists expected a 1
percent drop, according to a Reuters news agency survey.

Corporate earnings were up during that period but only because of cost
cutting and job layoffs. Earnings based on these factors cannot be
sustained over the long run because there’s a limit to both cost
and layoffs. With increased job losses, economists would of course
expect a decline in personal income. But they didn’t predict the
unexpected increase in personal spending that occurred in June, 2009,
although it fell again the following month. Logic would not suggest an
increase in consumer spending because of widespread unemployment.

When the government’s “cash for clunkers” program through which
prospective new car buyers were given a $4,500 credit toward a new car
purchase spurred sales, economists revised upward their predictions for
the gross domestic product for the second half of the year.

What all of the above indicates is that anomalous economic conditions
may occur that no one can predict. Economists know this, and disagree
with one another on the likelihood of something unforeseen happening to
defy their forecasts.

Analyzing and interpreting economic data is both art and science. In
its simplest scientific aspect, economics is generally predictable.

For example, if there’s a high demand for a product and the product is
scarce, its price will go up. As the price for the product increases,
demand for it will taper off. At a certain high price point, demand for
the product will almost stop.

Also predictable is what generally ensues from employment numbers. If
national employment is near 100 percent then the economy, generally,
will be flourishing and employers will have to pay higher wages to
attract personnel.

By contrast, when unemployment is widespread and jobs are scarce, wages
and benefits decline because of an over-supply of job applicants,
producing a negative impact on the economy.

The above factors are among the predictable elements of economics and
economists usually agree on them.

When interpreting other data, however, the economic picture is not as
clear and disagreements arise among the experts more frequently in this

Some economists may over-emphasize the importance of leading economic
indicators while discounting the significance of inflation, or the risk
of inflation in a vigorously growing economy.

Some economists may misinterpret the data. Others may give too much
weight, or not enough, to certain factors.

Other economists have a favorite formula for predicting the economic
future which may exclude certain items of data that if considered would
project a different picture of future conditions. Because they have not
analyzed a comprehensive mix of economic data, their judgments may be
variance with economists who have taken all the significant data into

Although economics deals with numerical data and well-established
formulae that work to solve various problems and provide insight into
economic activity, it is not a completely empirical science.
Furthermore, as mentioned, too many x-factors – the unpredictable,
including unintended consequences – may occur in the complex world of
economics thus surprising the experts and defying their forecasts.

Economists may be employed in a variety of different jobs. They may
work for the government, for business, or in the banking, brokerage or
financial industries. They may hold positions on Wall Street or in
academia, or work as journalists.

Each of these employers may have objectives or agendas which color the
opinions of their economists.

The economists whom we notice have disagreements are those who are
widely quoted in the media, or who write books, or appear on radio and
television. Countless others have their disagreements or agreements
quietly, beyond the scrutiny of the public.

One more factor to remember: a small category of economists are what is
called “contrarians.” These are economists (or market analysts) who
consistently disagree as a matter of principle, with the prevailing
market forecasts.

Finally, as mentioned at the beginning of this article, economists
have differing philosophical views of their discipline, and these as
well provide fodder for honest disagreement.


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