The Unassuming Economist

From a new VOX post on long-term growth forecasts:

“Although long-term macroeconomic forecasts substantially affect the sustainability of government debt and the social security system, they cannot avoid significant uncertainty. This column assesses whether academic researchers in economics make accurate long-term growth forecasts, comparing ten-year growth forecasts made by Japanese economists in 2006–2007 with the realised figures. Even excluding the years affected by the Global Crisis, the results show that forecasts tend to be biased upwards and involve significant uncertainty, even for economics researchers specialising in macroeconomics or economic growth.”

“Figure 1 shows the means and medians of forecast errors. Forecasts by the researchers in economics have an optimistic bias, similar to the findings for the forecasts by the government agencies. Even after removing the two years affected by the Global Crisis to calculate annual growth rates, a non-negligible upward bias remains: about 0.5-0.6 percentage points for real GDP growth and about 1.3-1.4 percentage points for nominal GDP growth. ”

International Monetary Fund advisor Prakash Loungani explains why economists have such a terrible track record when it comes to predicting recessions. Plus, Noah reflects on the Washington Nationals heading to the World Series. Listen to the podcast here.

From Congressional Budget Office:

“CBO’s economic forecasts have been comparable in quality to those of the Administration and the Blue Chip consensus. Large errors in CBO’s forecasts tend to reflect challenges faced by all forecasters.

 

Each year, CBO prepares economic forecasts that underlie its projections of the federal budget. CBO forecasts hundreds of economic variables, but some—including output growth, the unemployment rate, inflation, interest rates, and wages and salaries—play a particularly significant role in the agency’s budget projections. To evaluate the quality of its economic projections, estimate uncertainty ranges, and isolate the effect of economic errors on budgetary projections, CBO regularly analyzes its historical forecast errors. That analysis serves as a tool for assessing the usefulness of the agency’s projections.

In this report, CBO evaluates its two-year and five-year economic forecasts from as early as 1976 and compares them with analogous forecasts from the Administration and the Blue Chip consensus—an average of about 50 private-sector forecasts published in Blue Chip Economic Indicators. External comparisons help identify areas in which the agency has tended to make larger errors than other analysts. They also indicate the extent to which imperfect information may have caused all forecasters to miss patterns or turning points in the economy.”

Continue reading here.

An interesting presentation on recession dynamics by Tara M Sinclair from George Washington University. They answer three fundamental questions:

“1. Are we in a recession now?

2. When is the next recession coming?

3. What will the next recession look like? ”

Source: Recession 2020? Tara M. Sinclair @TaraSinc The George Washington UniversityResearch  Program on Forecasting

An intriguing analysis by the SEI Knowledge Center on forecasting recessions:

“To explore this possibility, we looked at the last 13 recessions in the US dating back to 1937. US data was used due to availability of a longer history; we believe the core conclusions of the analysis should be the same for any geography or market. We considered a range of sell-and-buy scenarios surrounding the official start and end dates of each recession, as determined by the National Bureau of Economic Research (or NBER, a private, non-profit, non-partisan organisation). The timing of our hypothetical decisions to sell out of the market and buy back into the market varied by up to eight quarters before and after each actual recession start and end date. This gave us a grand total of 2,577 scenarios to consider, as highlighted in Exhibit 1.”

Exhibit 1: Endless Possibilities

Source: Bloomberg, SEI