Don’t Bet On Anyone’s Forecast

If you want to be thoroughly befuddled about where the US economy is going, just ask three or more forecasters. Any experienced professional who tells you that he or she is quite positive about the path of the US or global economy over the next two or three years should be looked at with a very jaundiced eye.

In a recent survey of 43 forecasters, only eight of us did not have negative numbers for real GDP this quarter and two of these people had a highly improbable (it’s only happened once in our 237 quarters of history) 0.0 as their prediction. For the thrid quarter, only 11 people had a negative number and only four people expected a negative number for the fourth quarter of 2009.

Over the year ending in March 2010, the range was from a drop of 1.9 percent to an increase of 3.2 percent. That’s my forecast and I’m sticking to it, but you should be aware it’s one of the most optimistic out there.

A similar split showed up in the survey released by the National Association for Business Economics (NABE). There were 45 of us in this panel. The median forecast was for a drop of 1.8 percent this quarter and increases of 0.7 percent and 1.8 percent for the third and fourth quarters respectively. The five lowest forecasts were for -4.2 percent, -1.8 percent and 0.0 percent for those three quarters. The five highest were 2.8 percent, 3.3 percent and 4.0 percent for the same three quarters. That’s a huge split. Click here to read the full post and comment (Insights subscribers) »

“Not So Awful” Can Lead to Good News

Every Thursday (except for holidays) the Department of Labor gives us new data on the number of people who filed initial claims for unemployment insurance payments in the previous week. These numbers are quite volatile and are nearly always revised in the following week. For that reason, economists like to look at the four-week moving average (some prefer the eight-week one) to smooth out those bounces in the data.

Since the beginning of the recession on December 16, 2007, these reports have made ever-grimmer reading. However, that may be ending. Click here to read the full post and comment (Insights subscribers) »

In Defense of Chirpy Forecasts

The March 30 edition of Newsweek had an article by Kenneth Rogoff and Carmen Reinhart entitled, “Don’t Buy the Chirpy Forecasts.” He’s a professor at Harvard and a former, well-regarded chief economist for the IMF. She’s a professor at Maryland. They have a forthcoming book, This Time Is Different: Eight Centuries of Financial Folly, which sounds interesting. Related work can be found on Rogoff’s Harvard faculty contact page.

Here’s their main point: “The recessions that follow in the wake of big financial crises tend to last far longer than normal downturns, and to cause considerably more damage. If the United States follows the norm of recent crises, as it has until now, output may take four years to return to its pre-crisis level. Unemployment will continue to rise for three more years, reaching 11-12 percent in 2011.”

As you know, I put a great deal of emphasis on historical precedents. My favorite book on this subject remains Manias, Panics, and Crashes. Reading it should convince you that we’ll only have such a dire outcome if policymakers make mistakes as bad as those their predecessors made after the Panic of 1907 (the Federal Reserve System
wasn’t created until December 1913) or in 1929-1932 (there was no bank deposit insurance, the Fed allowed the money supply to shrink by 1/3, Congress enacted the catastrophic Smoot-Hawley tariff and kept raising taxes as government revenues declined). Click here to read the full post and comment (Insights subscribers) »