by Karen Brune Mathis
Managing Editor
(and more of economist Vitner’s lessons learned)
Wells Fargo Senior Economist Mark Vitner, whose first economics job was at Jacksonville-based Barnett Banks, marked 25 years of forecasting last year and shares 25 rules for analyzing the economy.
“This list has served me well over the past quarter century and hopefully will be of use to others,” Vitner says.
Vitner is based in Charlotte and regularly visits Jacksonville. He is scheduled to meet with the Economic Roundtable of Jacksonville on Tuesday.
His rules are centered on economics, but many apply to business owners, executives and professionals across the board.
• Use common sense. “Economics is just common sense made difficult,” Vitner says. “Too often, economists make things more difficult than they need to be.”
• Don’t assume how others should do things. “It is important to distinguish between what the Federal Reserve Board will do and what you think they should do,” Vitner says. The board governs the Federal Reserve System and makes policies that affect and guide the economy. Vitner credits his former Barnett boss, Jacksonville economist John Godfrey, with that lesson.
• Understand risks. “Recessions are caused by the buildup of imbalances and some sort of event or policy change that causes investors, consumers, businesses and regulators to become more risk averse,” he says. In other words, when you understand how recessions start, it’s easier to assess the risk of falling into one. The same could be said for problems facing any industry.
• Recognize what’s illogical. “Imbalances can build up far longer than seems logical,” he says. During an economic boom, “all sorts of justifications” for strong activity seem logical. But that leads to oversupply, such as with the housing market.
• Figure out which problems are systemic. For example, Vitner says that “persistent inflation is always a monetary phenomenon. Now and then, inflation erupts because of price increases caused by supply disruptions, commodity price increases or even bad weather.” However, ongoing inflation is a regulatory problem.
• Adjust for the desired result. “Rising food and energy prices by themselves are deflationary if they are not accommodated by a looser monetary policy,” he says. In other words, if consumers are spending income for necessities, they have less to spend on everything else.
• Conditions are seldom perfect. “Conditions do not have to be perfect in order for the economy to grow,” he says.”
• Look for the bright side. “There is a tendency for forecasters to focus more attention on what is wrong with the economy than what is right.” Focusing too much attention on the negatives can distract from seeing valuable opportunities.
• Expect growth. “The natural tendency for the U.S. economy is to grow,” he says. The U.S. adds population annually and Americans desire to live better than the generation before.
• Don’t underestimate. “The greatest forecasting mistake economists have made is to underestimate economic growth.”
• Trends end. “A trend will continue until it stops,” he says. The actual phrase, credited to economist Herbert Stein (father of comedian Ben Stein) and called Stein’s law, is “if something cannot go on forever, it sill stop.”
• Pay attention. “You can learn an awful lot about the economy simply by observing.” Vitner travels a lot and when airports became more crowded, for example, it signaled a shift in economic conditions.
• Trust your instincts. “Never be overly eager to change your forecast.” Vitner says that “some of the worst mistakes I have made have been to give up on a forecast too soon.”
• Mistakes happen. “Do not be afraid of making mistakes,” he says. “You will make them.” Do your homework, state your position clearly and identify the risks. “Then you are likely to be wrong far less than you are right.”
• Beware of too much of a good thing. “Rapid growth nearly always sows its own seeds of destruction.” Booms lead to busts because of overproduction or over-investment in the sector that is booming.
• Don’t lower your standards. “Booms generally lead to unforeseen problems.” Or, as investor Warren Buffett said, “You only find out who is swimming naked when the tide goes out.”
• If it’s too good to be true ... “Capital will always flow to the highest available risk-adjusted rate of return.” The greater the risks, the higher the return must be to attract capital.
• Everything changes, all the time. “The economy does not simply grow and contract; it is constantly evolving.” Also called “creative destruction,” the concept is there are always new industries as well as declining industries, but it’s easier to see the declining sectors than the growth sectors.
• Plan for the unexpected. “Soft landings are extremely hard to pull off.” As the Fed attempts to slow the economy after long business cycles, it risks being derailed by outside shocks. The economy was headed for a soft landing in 2001 when the 9/11 terrorist attacks put an end to that, he says.
• Prepare for change at the top. “Changes in political leadership matter.”
• Walk in others’ shoes. “View the economy through the eyes of a business owner, consumer and policy maker,” he says.
• Look harder at what doesn’t make sense. “Always look for consistencies and inconsistencies.” Inconsistencies could point to mistakes and vulnerabilities in the data being considered, he says.
• Would Mom approve? “Write your reports and give presentations as if you were explaining economic concepts to your mother,” he says.
• Respect the opposition. “Listen to those who have opposing views.”
• Know your limitations. “Do not outrun your headlights.” Vitner says to not try to do everything. Accept help. Concentrate on the things that you know and that you do best.
Vitner will speak to the Economic Roundtable of Jacksonville at 11:30 a.m. Tuesday at the Jacksonville University Davis College of Business. His topic is “Looking Past the Great Recession.” For information, visit www.ertjax.org.
356-2466