December 30, 2012

Charles Lawton: Economy on cusp of turning point – or is it?

"All the world's a stage,

"And all the men and women merely players:

"They have their exits and their entrances ..."

William Shakespeare, "As You Like It"

Not since the days of September 2008, when the Bush-Obama Treasury team debated the wisdom or folly of allowing Lehman Brothers to fail, has the world economy stood on the cusp of such a turning point. Retailers wonder if they will be able to salvage a mediocre holiday sales season with last-minute discounts. Households and businesses alike wonder what their taxes will be next week, next month, next quarter. Government agencies from federal to local wonder what their budgets will be. And, like any prudent household or business, Gov. Paul LePage has ordered temporary spending cuts as the state awaits possible revisions in projected revenues.

It is as if all the world really is a stage and its enormous troupe of actors is holding its collective breath waiting for a cue, some sign of when the next act is to start and what each is supposed to do.

It is at just these turning points that people look to the economic forecaster for direction. And it is at just these points that most crystal-ball gazers disappoint because turning points by definition are where past trends are of least use.

Take, for example, what is arguably the most vexing question now before Maine state policy makers:"What will fourth-quarter taxable retail sales be?" The answer to this question will confirm the hopes or fears of both retailers and, because of the importance of sales tax revenues to the budget, state program managers.

Consider two possible predictors of fourth-quarter retail sales: sales from quarter 3 (sales momentum) and fourth-quarter sales from the prior year (seasonal similarity). By both measures, Maine's retail economy has been improving. In 2008, fourth-quarter retail sales amounted to 84 percent of third-quarter sales, reflecting the natural drop-off from the tourist-heavy third quarter. By last year, that ratio had grown steadily to 91 percent, indicating both an extended tourist season and stronger resident spending. If that trend continues and the 2012 ratio rises to 92 percent, fourth-quarter retail sales in 2012 will reach nearly $4.7 billion, yielding tax revenues of nearly $233 million.

Next consider fourth-quarter trends alone. Here the news is even brighter. In 2008, fourth-quarter retail sales equaled only 93 percent of fourth-quarter sales in 2007. By 2011, that ratio had risen steadily to 106 percent. If this trend continues and the 2012 ratio rises to 108 percent of 2011's quarter 4 sales, fourth-quarter retail sales in 2012 will reach nearly $4.9 billion, yielding tax revenues of nearly $243 million, $10 million more than the amount estimated from a forecast based on quarterly sales momentum.

But what if we have reached a turning point? What if, rather than rising to 91 percent of third-quarter sales, fourth-quarter sales momentum in 2012 falls back to 90 percent? Or what if the fourth-quarter to prior-fourth-quarter ratio falls back to 103 percent of 2011's fourth-quarter sales?

Under these scenarios, fourth-quarter 2012 sales would come in at just under or just over $2.6 billion, a drop of between $100 million and $225 million from trend-continuing projections. And this would mean a drop of between $11 million and $15 million in sales tax revenues, clearly reason for taxpayers and legislators to stand back, hands on their hips, and demand, "Well, what's it going to be?"

And here the hapless forecaster can do little more than drop his/her crystal ball and reply, "There is no 'correct' answer. This is not my play to direct. Ours is an improvisational theater. We can talk endlessly amongst ourselves here in the wings, but eventually we simply have to step out on the stage and act our parts, whatever we conceive them to be, confident that, if we think clearly about the available facts and act with malice toward none, we can complete the work we are in and bind up our nation's wounds."

Charles Lawton is chief economist for Planning Decisions Inc. He can be reached at clawton@planningdecisions.com.

 

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