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View all search resultsEconomists should not make forecasts
Economic views often give a false sense of precision, because the reporting of economics is simplified and shortened.
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Economic views often give a false sense of precision, because the reporting of economics is simplified and shortened. (Shutterstock/File)
D
ecember always has a rash of economic forecasts for the year ahead. The reception areas at CNBC and Bloomberg TV are crowded with mobs of economists fighting to get their forecasts on air. But there are big problems with making precise economic forecasts.
Economic models are not precise. Models use lots of assumptions. Those assumptions may not turn out to be true. Models give a range of possibilities rather than a single, certain number. Economists know and understand these issues. However, the world of hashtag economics does not allow for all of this to be explained. It is difficult to warn about possibility ranges and underlying assumptions in 280 characters. This is why economists should not use Twitter (follow me @PDonovan_Econ).
Economic views often give a false sense of precision, because the reporting of economics is simplified and shortened. The illusion of precision is not helped by other media. A dramatic headline “Growth forecast to fall below 1 percent” attracts more readers or viewers. “Growth will be a bit below trend, probably” is far less dramatic.
Economists know that the real world is messy. The relationship between policy and the economy is always changing. The ways different parts of an economy behave are always changing. Past experience can never be a precise guide to the future. A further problem is that economic data is not very precise. Economists are trying to hit a target that is moving rapidly. Economic data is being revised more often, and the revisions are larger than in the past.
How fast did the US grow in the first quarter of 2015? It depends when you ask the question. Growth was initially reported very weak, in fact barely moving. Then the data was revised to show the United States economy was shrinking a lot (the number was –0.7 percent annualized). Then it was revised to show the economy was shrinking a bit. Then it was revised to show the economy was growing, but well below trend growth.
The growth number was then revised in line with trend growth. Now, US growth at the start of 2015 is thought above trend at 3.2 percent. So which number in the range of –0.7 percent to 3.2 percent is the economist supposed to be forecasting? An economist predicting 3.2 percent growth when the data was first released would have been ridiculed. According to the latest information we have, that economist would have been right.
Economic models produce imprecise forecasts for numbers that are revised significantly. So what can economics do?
