Forecasting with a Grain of Salt

Bloomberg News is out with its latest monthly survey of economists' forecasts and, according to those polled, the U.S. economy "will grow 3 percent this year and next, more than anticipated a month ago."

Good news, right?

Well, maybe not. If you go back and look at how the experts have fared when forecasting the pace of growth for any given quarter, let alone for the year ahead, their tea leaf reading skills have left a lot to be desired.

Based on an analysis of Bloomberg monthly surveys published just prior to or at the beginning of each quarter over the course of the past decade, the professional prognosticators as a group have rarely been close to the mark.

Except for the last quarter of 2007, when the economists' prediction (published in September) came within 5 percent of the reported result, the differences in percentage points between their estimates and the actual readings have been in the double digits -- at a minimum.

In fact, on three occasions -- the first quarter of 2000, the fourth quarter of 2002, and the third quarter of 2006 -- the economists overestimated the pace of quarterly GDP by 1,133 percent, 2,400 percent, and 2,900 percent, respectively.

Aside from the fact that many of the so-called experts still haven't quite figured out that what the economy has been going through is anything but a garden-variety downturn, their history of poor calls on the near-term outlook suggest their longer-term forecasts should be taken with a grain of salt.

Comments

[Chip]

Michael, As a small business owner in advertising / marketing I interface with hundreds of others in the "small business" realm. For most of the past 30 years it has made sense to operate a small business with excess personnel capacity because of upward trending growth (at varying rates, but almost constant growth). This "excess capacity" need exerted an unseen pressure on hiring practices. We hired for two reasons: today's need and the ability to smoothly handle growth which was sure to come.
Now that all of the businesses have faced two or more years of downward trending, it makes zero sense to have any excess manpower capacity. The ranks of the unemployed are swelled by both those directly affected by lowered sales but also the lack of need for any of us to prepare for growth and have excess capacity on board.
I have not seen anything written on this aspect of shedding extra capacity which was a an integral part of decades of growth. Are you aware of anything on the topic?
I guess another way of saying it is that we used to consider lower productivity a cost of the growth curve. Now productivity is studied more closely by us small guys because growth will not bail out wasteful practices in today's market.
I'm in Austin Texas, supposedly one of the "less affected" areas. I'm extreemly concerned about the slow velocity of money, the dismal sales reports I hear first hand, and the total lack of expansion in any sector. Of the hundreds of business owners I know NONE are hiring. Most feel fortunate when someone resigns. No one wants to send anyone into this aweful job market so those who quit provide the easy way to shrink the payroll. Small businesses are often run like family so many owners hold out as long as they can so that they don't have to be "cruel".
So, my forcast, with a grain of salt is "nothing cheerful on the horizon" for quite a while.....

[Matt]

so were just slowly going homeless. everyone jobless and worthless out there.

[Angryfutureexpat]

Chip's exactly right. In my business (before it failed recently) we would strive for approximately 10-15% underutilization so that a burst of business could be handled smoothly.

I can't even imagine anyone out there operating a business along those lines in this environment.

[J Minage]

Chip is mostly wrong. You simply cannot trust government stats like the red herring of productivity, GDP, inflation, money supply and unemployment, these numbers are cooked and baked to the hilt to benefit government's shrinking coffers.
When GDP tracks and includes mortgage refinancings and items that are imported, like car parts are counted twice, where is a tangible good created in the US economy that drives GDP or productivity ?
When housing values ballooned thru the early 2000s til 2007-8, I forecasted it would take the RE market at least 7-9 years to return to more normalized values, and that still has not happened. When wages do not keep pace with house price increases, average wage earners can no longer even modestly priced homes. We no longer have enough manufacturing to pull us free of recessions and now, real estate both commercial and residential is sacked. My question is where, mr obama will you create 95,000 jobs per month in 2010 ????