Why are “Expert” Predictions and Polls So Wrong?
How investors should receive data, polls and consensus expectations.
On Friday, June 5th, the Department of Labor reported that non-farm payrolls added 2.5 million jobs during the month of May. But “consensus expectations” were for May’s numbers to show a loss of about 9 million jobs. That 11.5 million “miss” is more than the population of New York City and Houston combined.
Then on Tuesday, June 16th, the U.S. Commerce Department reported that U.S. retail sales surged a whopping 17.7% in May, as consumers returned to shopping and spending. But economists surveyed by Bloomberg had expected only an 8% increase. That 17.7% gain represented approximately $485 billion, meaning the expert economists were off by about $266 billion, which almost as much as Amazon’s 2019 revenues.
On Thursday, June 18th, the Philadelphia Fed Index for June turned positive as it came in at a positive 27.5 from a negative 43.1 the previous month. Economists polled by MarketWatch expected a reading of negative 20. That’s not a little “miss.”
During quarterly earnings season, it seems as if most companies routinely beat “consensus expectations” when it comes to reporting earnings. Ever wonder why? Are consensus expectations pegged too low so that it will make companies look better? Or are the “experts” that incompetent?
Remember the polls that were so very wrong about Brexit, leading to a massive global market selloff as markets had priced in an expected outcome based on those polls (leading to trillions of dollars being wiped out)? Remember the polls leading up to our 2016 Presidential election?
These are just a few recent examples, but there are countless more that have us wondering how accurate
estimates from experts truly are, whether consensus expectations are helpful at all and if we can rely on polls to make investing decisions.
The short answer: take all expert opinions, polls and “consensus expectations” with a big fat grain of salt. Maybe two grains.
How Do Such Big Misses Happen?
It came as a shock to almost everyone when the May employment numbers were released. How did socalled experts miss predicting the numbers by 11.5 million? Are the numbers that unreliable or is there some deep-conspiracy that we don’t know about? No and no.
First off, the government agencies collecting data are having a challenging time given COVID-19. Just read the disclosure from the Bureau of Labor Statistics:
“Data collection for both surveys was affected by the coronavirus (COVID-19) pandemic. In the establishment survey, approximately one-fifth of the data is collected at four regional data collection centers. Although these centers were closed, about three-quarters of the interviewers at these centers worked remotely to collect data by telephone.
Additionally, BLS encouraged businesses to report electronically. The collection rate for the establishment survey in May was 69 percent, slightly lower than collection rates prior to the pandemic. The household survey is generally collected through inperson and telephone interviews, but personal interviews were not conducted for the safety of interviewers and respondents. The household survey response rate, at 67 percent, was about 15 percentage points lower than in months prior to the pandemic.”