The Unassuming Economist

From a new IMF working paper:

“I regress real GDP growth rates on the IMF’s growth forecasts and find that IMF forecasts behave similarly to those generated by overfitted models, placing too much weight on observable predictors and underestimating the forces of mean reversion. I identify several such variables that explain forecasts well but are not predictors of actual growth. I show that, at long horizons, IMF forecasts are little better than a forecasting rule that uses no information other than the historical global sample average growth rate (i.e., a constant). Given the large noise component in forecasts, particularly at longer horizons, the paper calls into question the usefulness of judgment-based medium and long-run forecasts for policy analysis, including for debt sustainability assessments, and points to statistical methods to improve forecast accuracy by taking into account the risk of overfitting.”

From a new working paper:

“Economic forecasts are often disseminated via a survey of professionals (i.e. “Consensus”). In this paper we compare and contrast the Consensus with a crowdsourced alternative wherein anyone may submit a forecast. We focus on U.S. Nonfarm Payrolls and find that, on average, Consensus is more accurate, but the best crowdsourced forecasters are superior to the best Consensus forecasters. We also find that information plays a key role. When the Consensus is uncertain and herds together, the crowdsourced forecasts appear to be more. Our findings provide evidence that crowdsourcing might provide a valuable supplement to traditional macroeconomic forecasts.”

A new Bloomberg post cites my study:

“Nine turbulent weeks and a correction in U.S. stocks have left analysts with a thorny question. What’s the market saying about the economy? And while few see incontrovertible signs investors are bracing for a recession, it’s a word that’s been coming up more as they seek a signal in the chaos.

From the ascent of defensive industries to the sudden craze for companies that resist volatility, stocks are acting in ways that have presaged slowing growth in the past. That makes sense: gains in the economy and corporate earnings are forecast to ease in 2019 from this year’s torrid pace.

Befitting that, most of the charts that follow reflect observations by analysts who don’t see a recession as the most obvious conclusion. Many view the sell-off as healthy after a 10-year run of gains. But with a trade war flaring and the Federal Reserve set to boost interest rates again, the number of stock researchers who are at least willing to mention the possibility is rising.”

“Economists haven’t always done a great job predicting contractions. A 2014 study by the International Monetary Fund’s Prakash Loungani found that not one of 49 recessions suffered around the world in 2009 had been predicted by the consensus of economists a year earlier. Loungani previously reported that only two of the 60 recessions of the 1990s had been anticipated a year in advance.”

“[…] the economic indicators that often precede recession — yield curve inversion and rising unemployment — are not flashing warning signs. The yield curve is flat but not inverted and the unemployment rate keeps falling, as opposed to rising when a recession approaches.”

From a new post by Francis Diebold:

“I just returned from a great BFI Conference at U Chicago, Developing and Using Business Expectations Data, organized by Nick Bloom and Steve Davis.

Wonderfully, density as opposed to point survey forecasts were featured throughout. There was the latest on central bank surveys (e.g., Binder et al.), but most informative (to me) was the emphasis on surveys that I’m less familiar with, typically soliciting density expectations from hundreds or thousands of C-suite types at major firms. Examples include Germany’s important IFO survey (e.g.,Bachman et al.), the U.S. Census Management and Organizational Practices Survey (e.g., Bloom et al.)., and fascinating work in progress at FRB Atlanta.

The Census survey is especially interesting due to its innovative structuring of histogram bins. There are no fixed bins. Instead users give 5 bins of their own choice, and five corresponding probabilities (which add to 1). This solves the problem in fixed-bin surveys of  (lazy? behaviorally-biased?) respondents routinely and repeatedly assigning 0 probability to subsequently-realized events.”

From the Economic Outlook for the Euro Area in 2018 and 2019:

“Signs of a slowing world economy are piling up: Since the beginning of the year purchasing manager indices have been declining globally, in summer higher US interest rates led investors to withdraw capital from emerging markets, and as a consequence, capital costs rose and currencies depreciated in many emerging markets economies. In October stock prices decreased markedly worldwide including the US, despite the strong upswing in this country.

As a consequence of the turmoil on financial markets, monetary conditions in many emerging economies are no longer favorable. What ultimately counts for the prospects of the global economy, is, however, the performance of the US, the Euro area, China and Japan. The upswing in the US appears stable enough to continue well into 2019. While at present the rest of the group appears to lose momentum, there is a good chance that production in each of these economies will still expand at rates that are close to their potential growth. Further protectionist rounds are the most important risk to this scenario.”

“In the first half of the current year the euro area economy expanded at a markedly slower rate than in 2017, about 0.4% per quarter, but still substantial. Rising risk premia on Italian assets will probably force banks in this large country to tighten credit conditions, and a slowing world trade will dent export growth. All in all, we expect GDP growth in the euro area to go down from 2.4% in 2017 to 2.0% in 2018 and to 1.7% in 2019.”

“Employment continues to expand and vacancy rates are at present higher than in 2017. As a consequence, wages rise more quickly: nominal compensations per employee started accelerating early in 2017, and negotiated wages followed at the beginning of 2018. Wage inflation of slightly below 2.5% and healthy growth in employment raise real labor incomes markedly.

Our forecasts are based on the assumption that rating agencies will continue as-signing investment grade to the Italian government debt, and that the Italian government and the European Commission will find a compromise about the draft budget of the country in the coming weeks. Another assumption is that the UK will not exit the EU in an unorderly way in March 2019”