Why Diss Economic Forecastors ?

One of the comments in a post yesterday (When Will the Recession End?) asked why I am “always dissing on other forecasters?”

As noted many times before, I believe forecasts are folly. I do try to wargame potential outcomes and various surprises, but that is to anticipate the unexpected — the variant perception — as opposed to regularly making bold declarative predictions.

When I do make a forecast, I try to couch them in terms of odds or probabilities. (The data implies; the odds are increasing that). I always want it clear that I don’t trust my forecast any more than I do anyone elses. (My calls aren’t perfect, but they have been better than most).

And for those of you who are fans of the wisdom of crowds, allow me to remind you how poorly the consensus of professionals did last year. As we discussed yesterday:

“Consensus? Why should investors — or homeowners, for that matter — care much about the opinion representing the consensus view? That consensus missed the credit bubble as it formed, wrongly believed the sub-prime issue were “contained,” and utterly missed the top in housing. If you followed the consensus, you lost 50% of your money last year, saw your home value drop 30%, and generally got mangled in most asset classes other than Bonds, Cash and Gold.

Rather than speak generally, let’s have a closer look at two forecasts a year apart by a group of professionals: The National Association for Business Economics:

Here is their perspective as it changed from November 2007 — just before the recession officially began, then in February 2008, when it was a few months old, and then in May 2008, two full quarters into the recession:


GDP Forecast via NABE


Now let’s fast forward a year, and see how their forecast are today:


Quarterly GDP Growth Forecast via NABE


Bottom line: Not only are they not very good, they are consistently too bullish . . .


Apprenticed Investor: The Folly of Forecasting
Barry Ritholtz
TheStreet.com, June 7, 2005

All graphs via NABE survey





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