There has been some discussion in the press lately, speculating on whether or not humans are actually hard wired to make poor financial decisions. Behavioral finance, a sub-set of economics, has suggested that we have a hard time taking actions that will provide a benefit in the future, if those actions require thwarting immediate short term desires (such as the simple act of delaying a purchase today, in order to save the money for a future goal). We can, however, set up systems for ourselves that will help us to work around these behaviors (such as an automatic savings plan).
I think that we also experience short term reactivity when we hear news about the economy, especially if the economic data being discussed has a strong emotional pull. We may not be distressed by the price movements of copper, but it’s easy to react with discomfort to less than happy news about jobs, employment, and housing since most of us work, and many of us are homeowners. The news last week, reporting only 80,000 new jobs created in June, was disappointing on face value, yet our short term emotional reactions to this disappointment could easily lead us to believe that this is permanent bad news, and it won’t get better, ever.
However, if we take the time to look at at historical economic data over longer periods of time (which we are not naturally inclined to do), perhaps we can curb our impatience that things are not “fixed” yet, and see the larger long term pattern. (Of course, the political haranguing leading up to the election will definitely take the short view and splatter blame for this freely and generously).
The chart I’ve provided shows us the historical pattern of job formation over the last twelve years, including the last two recessions. The gray areas indicate periods of normal economic activity, and the clear areas show the two most recent recessions. We do see the dive in job creation during the two recessions, and the gradual, and bumpy, climb-out afterwards. Notice, however, that there were also periods during normal economic times, when we had zero new job formation for a given period. The truth is, job formation is choppy after recessions (look at the pattern!) and seasonal (for example, it typically slumps during the summer months).
Yet, the media reports pretty much overlooked a couple of happier items: total hours worked and wages jumped up during the same period. Humans have another unfortunate trait (which is a survival mechanism that does not always serve us well) - we pay far more attention to negative news than to positive news.
It’s really important to have context and perspective while looking at the economy and its indicators. My next economic update Webinar will be Wednesday, August 22 at 11:00 am Pacific Time. These Webinars provide you with a system that allows you to learn about “hot button” economic topics in more depth than you will get during a 30 second news item. There is much more to GDP growth, job creation, deficits, and Eurozone issues, than meets the eye (or can be contained in a single data point), and during each Webinar, we’ll break down a couple of these topics and look at the full set of information that lies behind them, to get this needed context and perspective that can lead to a much more balanced outlook. The chart that I’ve included today is an example of the type of analysis that is provided during these Webinars.
Go to http://www.focusedfinances.com/ and click on the Event Calendar to see our Webinar schedule. You can click on the event and register for it right there.
