Who Ya Gonna Call? Corporate Economists Hot Again As Data Interpretation Needs Grow

Yeah, so it's awesome that you are generating all this data about your enterprise. And it's too bad that you're really too busy to figure out what it means. But just having is a comfort, for sure. 

Which is where a lot of organizations are when it comes to actually interpreting and then putting in context all those numbers that everyone tells them they have to have in order to be relevant.

Cuz Big Data is right up there with Disruption as one of the key competitive differentiators any executive has to have these days to be credible. Innovation is just so 1999.

The issue most organizations face when it comes to data is that there are not enough competent people around to make sense of it all. Economists may not enjoy the most robust reputation when it comes to forecasting (financial crisis! who could have foreseen such a thing...?) but they are trained in the art and craft of data analysis. And that is very convenient both for them, since that financial prognosticating thing is going to take a while to come back from - and for the institutions who have been told that data is the next big thing, but having invested in generating it are now not so sure what to do with it.

It could actually generate some intellectual heat if the economists are are allowed to apply their skills - and the organizations are sensible enough to ask good questions. As the old saying goes, 'it may work in practice, but will it work in theory?' JL

Bob Tita reports in the Wall Street Journal:

The Shift Comes as Firms Cope With a Glut of Data; Recession 'Laid Bare' Forecasting Mistakes.

Flooded with data, Parker Hannifin Corp.  PH in Your Value Your Change Short position hired a young economist in 2008 to figure out what the information meant to the industrial conglomerate's far-flung operations.

What Ryan Reed told executives in one of his first presentations didn't go over well. Looking at capacity utilization rates—the percentage of available production capacity that is actually in use—Mr. Reed told executives that sales in the company's automation business would be substantially lower in October. "The guys said: 'That can't be right. October is normally a really good month for us.' "

But Mr. Reed's forecast was indeed correct. October wasn't a good month for automation, or for any of the Cleveland company's business units. The U.S. economy was on the verge of what would become the worst economic convulsion since the Great Depression. "We've lurched from crisis to crisis since then," said Mr. Reed, now 32 years old.

With more data available than ever before and markets increasingly unpredictable, U.S. companies—from manufacturers to banks and pharmaceutical companies—are expanding their corporate economist staffs. The number of private-sector economists surged 57% to 8,680 in 2012 from 5,510 in 2009, according to the Bureau of Labor Statistics. In 2012, Wells Fargo  WFC in Your Value Your Change Short position & Co. had one economist in its corporate economics department. Now, it has six.

"A lot of companies have programmers who are able to process big data," said Tom Beers, executive director of the National Association for Business Economics in Washington, a professional organization with about 2,400 members. "But to find a causality between two things and draw a conclusion really takes somebody with an economics background."

Many companies had corporate economists on staff in the volatile 1970s and '80s, but dropped them when the U.S. economy was steady and strong. Information from government agencies, such as industrial output from the Federal Reserve, was plentiful, along with research from private consultants, including Macroeconomic Advisers LLC in St. Louis and IHS Global Insight of Englewood, Colo.

"The reaction in the corporate world was: 'I can get my average GDP forecasts from anybody. Why do I need an economist in my shop?' " said Ellen Hughes-Cromwick, chief economist for Ford Motor Co.

The key to the revival of in-house economists, companies and economists say, is the need to digest huge amounts of data—from production volumes in overseas markets to laptop usage in urban areas—to determine opportunities and risks for companies' business units, not just in the U.S. but around the world.

Paul Thomas, chief economist for chip maker Intel Corp.  INTC in Your Value Your Change Short position , said he and his staff look at how and where consumers are using personal computers, laptops and hand-held devices to pinpoint what geographic markets are underserved and which ones are saturated. "It's something we're learning to do that's going to be useful," he said.

The glut of available data is forcing economists to serve as gatekeepers to ensure that disparate units within companies are using the same data sets and information inputs in their forecasting.

Richard DeKaser, a vice president and corporate economist at Wells Fargo, leads a team of eight people, including six economists, who standardize the models and data used to measure risk in different business units, such as mortgage lending and credit cards.

Previously, one unit might base unemployment figures on payroll data, while another would use household surveys. Doing so undermined the accuracy of tests to measure risks for losses and contributed to mistakes in business planning.

"The great recession laid bare a lot of fundamental mistakes that an economist can be useful in preventing," said Mr. DeKaser, who was previously chief economist for National City Bank.

Some corporate economists are also taking higher public profiles to communicate their companies' messages and forecasts. Mark Finley, general manager of global energy markets and U.S. economics for energy company BP  BP in Your Value Your Change Short position PLC, spends about 30% of his time on the road talking with customers, business groups, trade associations and reporters to build consensus for its outlooks on energy demand and pricing. "The economists are supposed to be out there presenting their views," he said.

James Meil, chief economist at diversified manufacturer Eaton Corp. ETN in Your Value Your Change Short position , and his staff of four, made 78 formal presentations last year, including one to the Association for Hose and Accessories Distribution. Distributors and suppliers, especially smaller ones, often rely on economists from their bigger customers to help decide whether they should add production capacity.

"There's not readily available market data or trends data available for the hose markets," said Joseph Thompson, executive vice president of the association, which represents manufacturers and distributors of industrial hoses, fittings and fluid-transferring equipment.

Veteran economists like Mr. Meil, who has been with Eaton for 29 years, are consulted on big acquisitions. When Eaton bought Cooper Industries PLC in 2012 for about $11.8 billion, he provided market research for key business segments and forecasts for the combined company's end markets.

Air Products and Chemicals Inc. uses its economist to devise hedges in a more volatile global economic climate. The Pennsylvania-based supplier of industrial gases enters into 10- to 20-year contracts with drug companies, steelmakers and refineries and needs price-escalator clauses to reflect higher production costs, such as energy.

"We set up formulas to where we're just trying to capture the inflationary pressure on the underlying contract," said economist Joseph Cardinale, who recently left Air Products for an economist's job at Illinois-based pharmaceutical maker Abbott Laboratories.

Like all forecasters, corporate economists can miss the mark. In 2012 many company economists expected about 6.5% growth in manufacturing output in Asia. But it ended up being 3.5% due to a sluggish economy in China. "Forecasts by definition are going to be wrong," said Mr. Cardinale.

Retired economist Frank Schott, 87 years old, said new veins of data don't guarantee accuracy in forecasts. "The data are just as recalcitrant as ever to give you answers and the multiplicity of it invites further confusion," he said. "Everybody, including corporate bosses, thinks they're their own best economist."

Before Parker hired Mr. Reed, group presidents provided forecasts. "They weren't very accurate," said Jeff Cullman, president of Parker's hydraulic business. He said Mr. Reed has been able to forecast when hydraulic demand was about to fall, allowing the company to get a head start on scaling back production. "The market turns relatively quickly, but it takes us about three months to get on the brakes,' he said.

Forecasting can be tougher in developing countries where market demand can be difficult to quantify and data is spotty. Mr. Reed recently constructed a model for Parker's new president of Latin America to indicate where the company should focus sales efforts. "His gut was telling him we're doing pretty well in Brazil; maybe we should look more at Argentina," he said.

By parceling out Parker's sales in specific industrial markets in Argentina and Brazil and comparing them with the two countries' total output in those markets, Mr. Reed demonstrated that Parker's sales potential in Brazil was far greater than in Argentina and to remain focused there. "Hopefully we avoided putting a lot of resources into Argentina where there's just not much to capture," he said.