The Exercise of Economic Forecasting

By Bryan, Mike | EconSouth, Fall 2009 | Go to article overview

The Exercise of Economic Forecasting


Bryan, Mike, EconSouth


Whenever I give an economic outlook speech, I like to begin by pointing out how notoriously inaccurate economic forecasts are. I usually show the year-ahead predictions of top economists and then report what actually happened. Ordinarily, the predictions aren't very close. In fact, the standard error for the year-ahead growth forecast is about 1.5 percentage points, meaning that the typical one-year-ahead growth forecast encompasses a range of reasonable possibilities so large that it usually includes the likelihood of both strong growth and considerable weakness.

I can usually count on getting a big laugh at this point, which is partly why I do it. But showing how poorly economic forecasts predict the future makes me feel more honest about whatever economic prediction I'm about to lay on the audience.

And here's another humbling observation: Economic forecasts are especially inaccurate when you need them most-around turning points in the business cycle. Forecasting models have a hard time seeing a recession in the making, and--as in the current environment-they have a hard time spotting when recovery will begin.

It's not a number, it's a conversation

So why even bother with economic forecasts? The value of an economic forecast isn't justly measured by the accuracy of a specific prediction over a specific horizon. The forecast guides a discussion on issues that are crucial to making decisions: What are the key assumptions on which the forecast is based? What is the strength of these assumptions? How does this forecast compare with forecasts based on alternative beliefs? And how do we weigh one forecast path relative to another one? In the case of the Federal Reserve Bank of Atlanta, I think the underlying value of an economic forecast is that it represents the foundation of an important dialogue between the research department and Atlanta Fed President Dennis Lockhart.

So our forecast exercise doesn't rely on just one economic model for our forecast; we run a collection of them. Some of the models we use are purely statistical, some are stripped-down economies, and some are large empirical models. None of these models is likely to be "accurate" in that it consistently produces the best prediction. However, taken as a whole, these models provide guidance about a range of possibilities that influence how a Reserve Bank president weighs policy options.

The current conversation

In recent months, the Atlanta Fed has judged that the incoming data indicate greater economic stability. We've seen signs that financial markets are improving and key markets such as residential real estate are no longer deteriorating. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

The Exercise of Economic Forecasting
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.