The Unassuming Economist

James Mackintosh in the Wall Street Journal says “economics is hopeless at predicting big turning points in the economy, precisely the moments you most want advance warning. Studies by Prakash Loungani, chief of development economics in the International Monetary Fund’s research department, and collaborators have shown the failure to forecast recessions. Not one of the 62 recessions in 2008 and 2009 worldwide was predicted by the average collected by Consensus Economics by September of the year before. For the U.S., the economy’s only ever been forecast to shrink after a recession has already begun. “I’m a bit puzzled as to why so much attention is given to the point estimates for forecasts,” Mr Loungani says.”

“Investors might be tempted to consign economics to the joke book and get on with their lives. That would be a mistake. Economics can be useful, but only when used correctly to assess different scenarios. Specific forecasts for the economy must come with probabilities and clear assumptions–and the assumptions need to be critically examined by users of the forecasts, not hidden in the models or the appendix.”

Continue reading here.