Expectations versus Reality

One of my favorite movies in the great movie year of 2009 was 500 Days of Summer, and my favorite scene in the movie is the Expectations versus Reality scene (the Turkish subtitles are not intentional; it is the only copy I found after a Google search)- I love the cinematography, and the Regina Spektor song fits the scene really well.

Anyway, I recently sort of lived the economics version of that scene when I looked at the latest CBT bi-weekly expectations survey:

The first thing you notice is how "adaptive" inflation expectations are. After the low December inflation, end-year and 12-month ahead inflation expectations plunged. Even the 24-month ahead figure was affected. That's why I advise not to make too much of sudden movements in inflation expectations.

The second thing noticed was the inconsistency between growth and current account expectations for this year. I am OK with the 2011 growth forecast for this year, which is consistent with my outlook as well. But there is no way the current account deficit would be USD 46bn at that growth rate- unless you are making some weird assumptions on the exchange rate. Or to put it differently, if the current account is to be USD 46bn in 2011, growth would have to be much less. Moreover, for the CAD figure to be realized, imports would have to growth about 70% or so less than exports (or exports 40% faster than imports)!

That's why a simple excel sheet that links the different accounts of the macroeconomy and ensures consistency goes a long way for good forecasts- that's what I was doing when I was doing my own projections. It is true that these are averages of forecasts, so they don't have to be 100% consistent. But even if the averages are so different, there must be something fishy going on...

BTW, when I said exports and imports were the most important part of the current account a couple of hours ago, this is exactly what I meant:)

Coming back to movies, I looked at the top 250 IMDB movies by year and found out that they are far from being evenly distributed; there are indeed great movie years, like 1998, 1999, 2009- and mediocre ones, like last year. But that's for another post....