The Year in Review: Rating the Consensus and Bureau 1991 Forecasts
Gnuschke, John, Alvarado, Lew, Business Perspectives
As part of its public service function, the Bureau of Business and Economic Research (BBER) at Memphis State University compiles, analyzes, and disseminates a wide variety of economic information at the national, state, and local levels. Normally, its basic task is to follow and report on economic trends in as timely a fashion as the current data allow. However, once a year the Bureau stops to reflect on those trends and provide a forecast of likely trends during the upcoming year.
The Memphis community has access to a large selection of macroeconomic forecasting services that generally require a subscription fee. Moreover, many other forecast of economic trends are readily available in newspapers, business magazines, and economic journals. The Bureau's main objective is to sort through these forecasts and determine a consensus forecast for the upcoming year. Then, as a counterpoint, the Bureau seeks to provide an alternative assessment or confirmation of the consensus forecast. In this way, the Bureau seeks to (1) provide the Memphis community with the latest information on likely economic trends over the next twelve months based on a consensus forecast and (2) provide an expanded analysis of the economic factors that are most likely to impact those trends in either a positive or negative way. The four economic variables that the Bureau forecasts are economic growth, interest rates, inflation, and unemployment.
The following synopsis of last year's forecast illustrates just how challenging (and humbling) gazing into that crystal ball can be. The dramatic and swift change in economic events during 1991 left many an intrepid forecaster dead in his tracks. Not to mention the general confusion associated with the Department of Commerce's switch to Gross Domestic Product (GDP) as the new measure of economic performance and the rebasing of most economic indicators to 1987 dollars. However, a brief look back at the Bureau's forecast for 1991 can provide a somewhat clearer picture of which economic trends most affected the economy's performance.
The consensus forecast suggested a shallow recover beginning during the third quarter of 1991, with total growth for the year at a meager 0.1 percent. The consensus also pinpointed the start of the recession in October 1990, which was the beginning of the first of two quarters of negative economic growth. As a counterpoint, the Bureau forecast a much longer and weaker slowdown throughout most of 1991 with the recession beginning much earlier in July 1990.
ACTUAL: Economic growth stalled during the fourth quarter of 1991 registering an annual rate gain of only 0.3 percent. The first quarter of 1991 opened with a decline of 2.5 percent, followed by subpar positive growth rates in the second and third quarters of 1.4 and 1.8 percent, respectively. Faltering consumer confidence translated into reduced spending during the last quarter of 1991. Exports remain the only bright spot on the economic horizon.
The Bureau correctly foresaw an earlier start to the recession and much weaker growth during the second half of 1991 compared with the consensus forecast. The much-anticipated second and third quarter gains had many forecasters proclaiming the end of the recession. While the fourth quarter 1991 estimate is subject to two more revisions, the final verdict on when the recession ended will be open to debate, especially if there is a downward revision in the fourth quarter estimate. …