Comments on economics, mystery fiction, drama, and art.

Saturday, November 15, 2014

What do people know--or think--about what's happening in the economy?

We've been having a conversation about a recent survey (reported here) which finds an average response to this question:

What do you think the current unemployment rate is?  (The unemployment rate is the percentage of people who are unemployed and are actively seeking work.)
Apparently, the average of the responses was 32%, at a time when the actual unemployment rate (as reported by the Bureau of Labor Statistics) was 6.1%.  (Unfortunately, I can't find a time-series of responses to that survey, or t a similar one). 

Made me think, though.  What about something else?  What about inflation expectations?  As it happens, the OECD has done a survey since January 1978 asking people what they expect the rate of inflation to be for the next year.  And, of course, for most of that period, we can calculate the actual rate of inflation for the 12 months following each monthly period.  How'd people do?

(Click to enlarge.)

I must say I think that's actually a pretty good result.  While people who responded to the survey fairly consistently expect inflation to be faster than it actually has been, expectations forecast actual inflation quite well.  The correlation between expectations and actual over this period is 0.80, which is quite strong.

So maybe there's something special about unemployment that throws people off...or maybe respondents would do better if he survey were conducted regularly...


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