: By Paul Sperry, Investor's Business Daily
For years Wells Fargo & Co. kept a stable of economists. But when it bought out First Interstate Bancorp last year, the economists were among the first to go. First Interstate's economists were also fired. All told, about 15 highly trained data gurus lost their jobs. In sum, ''We eliminated the economics divisions of both companies,'' Wells Fargo spokeswoman Lorna Doubet said. Not too long ago such a move would have been viewed as rash, even crazy. Economists were thought to be indispensable. But no more. Economists' clout has diminished. Thanks to the Internet, they no longer have central control of data at firms. And their forecasts aren't as reliable as before in today's fluid, high-tech economy, where product cycles last as little as six months.
At first, old industrial giants, such as Inland Steel Industries Inc., phased economists out. Now even data-drenched firms are jettisoning them. ''We didn't feel we needed to have economists on staff,'' Doubet said. When the San Francisco-based bank needs economic analysis, it contracts out for it. Economists have become an easy target for cost-cutters. Many have doctoral degrees and are highly paid. And firms are also finding their forecasts less useful.
| National Semiconductor Corp., for one, was so frustrated with economists' forecasts that it let a team of computer scientists and mechanical engineers take a crack. And so far they've had better results. ''We're finding data sources that have never been used,'' said Mike Kimball, a mechanical engineer who heads the chipmaker's forecasting team. ''We're sort of amazed that people that do this for a living have never gone after the same sort of thing.'' |
Problem is, economists tend to share the same data and then build arcane math models to forecast market trends. But that's like trying to study bird behavior in the Amazon rain forest from a helicopter, says Michael Rothschild, president of Maxager Technology Inc., a San Francisco-based software firm. ''Biologists don't do that,'' he said. ''They're down there in their waders figuring out how many yellow-headed parrots are in a given hectare. That's called science.''
Most economists refuse to get down to that dirty level of detail, Rothschild says. ''They deal in averages, which is completely useless in an economy with so many eco-niches,'' he said. ''That's why they're being bounced out of corporations.''
Indeed, the number of corporate economists in the nation has dropped 15% over the last dozen years. The profession reached its heyday in the '60s, when economists were widelysought by corporate America and Washington. But they quickly lost favor after the 1973 oil shock. It threw a wrench into their static models, making it hard for them to provide good information. Things got worse in the 1981-82 recession. Manufacturers began downsizing, and the ranks of corporate economists started to thin. The advent of the desktop computer, which let managers chart their own data, made it easier to ax economists.
But many economists have found jobs in other areas, such as marketing and finance. ''Economists are showing up in different functions,'' said Mark Zandi, chief economist at Regional Financial Associates, a consulting firm in West Chester, Pa. ''Their tools are still useful. They're just not called economists.'' Many are now calling themselves consultants. And in some cases they're helping the firms that let their economists go.
Regional Financial, for one, has prospered from the downsizing and outsourcing trend. ''We've gotten calls from all the groups at Wells Fargo,'' Zandi said. Zandi is helping banks like Wells Fargo make sense of an odd new trend in the industry: Personal bankruptcies and credit card delinquencies are soaring even though jobs are plentiful.
Zandi says it's an example of how the new economy is confusing a lot of executives. Many of the old rules no longer apply. And that, in turn, has created new demand forpeople who are skilled in analyzing consumer behavior.
''It's not that the information isn't needed anymore,'' Zandi said. ''It's just that economists aren't providing it in the conventional way.'' But the new economy has flummoxed a lot of economists, too.
Most have been trained to think of the economy as a machine that can be ''jump-started'' or ''fine- tuned'' when needed. If you put ''x'' in the carburetor, you'll get ''y'' output. Rev the economy too high, and it may ''overheat.'' Throttle it and it may ''stall out.''
But the new economy is neither static nor predictable. It's constantly changing, much like a rain forest. Yet many economists, like zoo keepers, still think they're observing a closed, controlled system.
It's hard to blame them. It wasn't too long ago that the economy was driven by a handful of big smokestack industries. Things were simpler then, before the microchip. ''We woke up in '71 and had a computer on a chip,'' Rothschild said. ''And we got thrust into this new economy,'' which moves around more coded bits of information than nuts and bolts.
The chip has triggered an explosion of new technology and information. And economists, trained to measure tangibles, can't get their arms around it.
Consider how fast technology spreads today. It took 46 years for a quarter of U.S. homes to be wired for electricity. Getting phones to a fourth of homes took 35 years; cars, 55 years.
But the personal computer required just 16 years, the cellular phone 13 and the Internet seven. All are run by chips. Even the microwave oven and videocassette recorder illustrate how the chip has sped up the spread of technology. Though both products were invented in the early '50s, by 1971 less than 1% of homes had either.
By 1986, a quarter of homes had both. That said, it's next to impossible for economists to forecast with any precision. Take the airline industry, for example. In the past, economists could predict how much air travel would increase if the economy grew at a certain rate. Now, they have to control for fax machines, wide-area networking, telecommuting, video-teleconferencing and
the World Wide Web - which all affect air travel.Even so-called ''quant-jocks'' concede that their forecasting models often mislead because assumptions about technology seldom pan out, says Danny Bachman, who manages WEFA Group's macro model. ''We use our judgment now,'' he said. ''We make sure the numbers make sense first. If they don't, we override them and spin the model again.''
Some wonder whether economists should be using such math models at all. As sophisticated as they sound, they rather simplistically assume a linear, static environment that hardly represents a world of constant change.
There are so many powerful forces at work - not just cyberspace and global capital, but also government downsizing and tax reform - that don't fit into such rigid constructs.
''You can't incorporate political inputs around algebraic formulas, which is all they are,'' said economist Audrey Freedman, president of Audrey Freedman & Associates in New York.
Rothschild says high-tech firms have little use for such macro models. ''They don't want to know about aggregates,'' he said. ''They want to know about individual markets.''
Zandi has heard the same thing from his clients. ''(Gross domestic product) forecasts are less useful,'' he said, ''because a lot of businesses today aren't tied to aggregates.''
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Santa Clara, Calif.-based National Semiconductor is one high-tech firm that's fed up with mainstream economists. Their forecasts for both the economy and the chip industry have been wrong as much as they've been right, executives complain."Half of them are out to lunch,'' said Mike Kimball, senior manager of market intelligence and research. He gives high marks to a few, though namely Deutsche Morgan Grenfell's chief economist, Edward Yardeni (''pretty perceptive''), and Hewlett-Packard Co.'s chief economist, Richard O'Brien (''pretty sharp''). Kimball, the mechanical engineer, leads a group of other non economists, non-Ph.D.s, seeking to help the company forecast market trends. His team uses a trove of government data that other economists have long ignored. They then plug the data into a computer using Neural Net, a pattern-recognition software, which helps highlight turning points. The results? ''Encouraging,'' Kimball said. |
''Economists need to start understanding that economics is the study of human action,'' said Brian Wesbury, chief economist of the Chicago bond firm of Griffin Kubik Stephens & Thompson Inc. ''It's free-flowing and alive, not static or mechanical.'' The new economy demands ''creative, imaginative and flexible'' thinkers, he added, not just ''number-crunchers.''
Economists locked in the ivory tower will be the last to change, predicts Rothschild, who wrote the book ''Bionomics: Economy as Ecosystem.''
When he gave a talk to the Stanford University economics department, the professors were polite but very cold, he recalls. ''Their attitude was, 'You don't even have a Ph.D. What do you know?' '' said Rothschild, a Harvard MBA.
Copyright 1997 Investor's Business Daily, Inc.
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