Consensus Surveys

You’re al l set to go out for a lei surely walk. Weather forecasters have predicted sunny
skies and warm temperatures, so you head out in shorts and leave the sweater at home.
Ten minutes later a heavy thunderstorm erupts, fol lowed by colder air. You quickly
scramble back for a change of clothing, all the while cursing the forecasters. How could
they have gotten it so wrong?
Money managers encounter similar experiences, except that instead of weather
reports, they tend to rely on surveys that feature forecasts from experts on what an
upcoming economic indicator will report. If the actual economic news falls in line with
expectations, there is generally little market reaction to the news because investors
already anticipated it. By getting it right, those forecasters demonstrated that they have a
good grasp on what the economy is up to. However, had the news about the economy
turned out to be radically different from what private experts predicted, money managers
would have rushed in to readjust their investment positions. These abrupt moves can
potentially shake up the value of stocks, bonds, and currencies. Why such violent market
reactions? Any major departure from expectation means that something is going on in the
economy for which the experts failed to account. Naturally, this creates fresh uncertainty
about current and future economic conditions. The bigger the gap between consensus
expectations and reality, the larger the backlash in the financial markets.
Who puts out these consensus surveys, and how are they done? Many financial wire
service organizations, such as Bloomberg, Dow Jones, Reuters, and Market News
International, produce their own consensus surveys by polling economists for their pre-
dictions on key upcoming economic indicators. These indicators include consumer prices,
producer prices, industrial production, retail sales, capacity utilization, and others. The
methodology used is fairly simple: The responses of individual business economists are
basically averaged out, and that becomes the consensus forecast.