Snap out of It!

By Gross, Daniel | Newsweek, January 11, 2010 | Go to article overview

Snap out of It!


Gross, Daniel, Newsweek


Byline: Daniel Gross

The dangers of economic pessimism.

Since 2007 the consensus of the economic establishment--bankers, policymakers, CEOs, stock analysts, pundits--has been catastrophically wrong. They didn't see the economic storm clouds gathering. When the raindrops began to fall, they failed to forecast the deluge. As a result, throughout 2008, executives, investors, and consumers chased the economy down--cutting back after things unexpectedly got worse; cutting back again when the roof fell in.

The Great Panic of 2008 may have destroyed blind optimism. But if excessive optimism was the near-fatal pose in 2008, blind pessimism has emerged as the reflexive post-bust crouch. And it has led the economic establishment to miss yet another inflection point. While we were wringing our hands about America's financial and industrial crisis, we ignored a parallel narrative that was emerging: the repairing of balance sheets, an embrace of reality, a nascent recovery. The same folks who chased the recession down now are likely to chase the recovery up.

Even as the economy started improving, corporate America continued to prepare for Armageddon for much of 2009. Inventories of manufactured goods fell in 10 of the first 11 months of 2009. Between October 2008 and October 2009, retailers slashed inventories from $500 billion to $432 billion. Translation? Pessimistic about their ability to sell stuff, companies cut way back on their orders. But when consumer demand finally materializes, retailers will be caught flat-footed and miss out on sales. Like when you go into the local Gap, ready to spend, but it doesn't have the jeans you want in your size.

Excessive pessimism in other areas has been more costly. Virtually all the market geniuses who hung on as the Dow was scythed in half between October 2007 and March 2009 failed to call the market turn. Most hedge-fund managers have chased the 60 percent rally since March, not led it. Economic forecasters similarly missed the dramatic turn in the overall economy this spring. Having failed to forecast that the economy would shrink at a 6 percent annual rate through the first quarter of 2009, economists also failed to project it would start growing again at a decent pace in June. And they're still behind the curve.

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