The Economy, Psychology, and Cluelessness
4/20/2005 5:40:01 PM

The Wall Street Journal's latest Monthly Economic Forecasting Survey (April 2005) offers a case study in how clueless economists are about the role psychology plays in the economy.

One of the survey questions went like this:

"What price for crude oil, if sustained for a meaningful period, would tip the U.S. back into recession?"

It was a multiple choice question: the choices were "$50-$59," "$60-$69," and so on, up to "$90 or more." Obviously this last choice was the highest price range, and in fact received the largest number of votes. The low end got no votes, given that $50-$59 is precisely where crude oil prices have been since about mid-February.

But wait.

This wasn't the first time the WSJ put that question to the economists who participate in the monthly survey. Let's go back to August 2004. Same question, same multiple-choice price ranges. The survey was conducted from August 6-9, at which time crude oil prices hovered in the mid-$40s.

What was the preferred answer then? You guessed it: "$50-$59" got the most votes.

So let's think about this. U.S.  households (no doubt Canadians too) have been willing not only to take on unprecedented levels of credit card debt, but also to "cash out" every available dollar of home equity.

Yet these professional economists went on the record to say that, if consumers had to pay a few more cents to fill up their SUVs, the spending and debt binge would slow down enough to put the economy in recession?

If the "experts" are this ignorant about the importance of psychology to the economy, can they have a sweet clue about psychology and the stock market? ...If there's a time that investors need to understand the price AND psychological trends in the market, this is it.