The Unassuming Economist

This year’s award is shared by Allan Lichtman and Helmut Norpoth, two political scientists, who forecasted a Trump victory in the U.S. Presidential elections. Though I started out giving the award to people who had the courage to forecast recessions, I think it is good to broaden it to recognize courageous forecasts in other areas. Both Lichtman and Norpoth described the basis on which they were making their forecasts, which is an essential consideration in who gets the award. Outrageous forecasts made without providing some reasoning don’t qualify. The 2016 award went to Michael Shedlock (“Mish”) and the inaugural 2015 award to Lakshman Achuthan.

The latest World Economic Outlook (WEO) Update says that: “After a lackluster outturn in 2016, economic activity is projected to pick up pace in 2017 and 2018, especially in emerging market and developing economies. However, there is a wide dispersion of possible outcomes around the projections, given uncertainty surrounding the policy stance of the incoming U.S. administration and its global ramifications. The assumptions underpinning the forecast should be more specific by the time of the April 2017 World Economic Outlook, as more clarity emerges on U.S. policies and their implications for the global economy.”

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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.”

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A new IMF working paper by Sophia Chen and Romain Ranciere studies the forecasting power of financial variables for macroeconomic variables for 62 countries between 1980 and 2013. They find that financial variables such as credit growth, stock prices and house prices have considerable predictive power for macroeconomic variables at one to four quarters horizons. A forecasting model with financial variables outperforms the World Economic Outlook (WEO) forecasts in up to 85 percent of our sample countries at the four quarters horizon. They also find that cross-country panel models produce more accurate out-of-sample forecasts than individual country models.

Barry Ritholtz lists economic predictions about 2016 that didn’t come true. Read the list here.