In a former life, I wrote a blog, “Obvious Insights,” that had a readership of about seven. In it, I would report on the major economic releases of the week ahead, as well as comment on those of the week just ended.
I had a front row seat to what I now recognize is the folly of forecasting. Each week, countless hours and brain cells are used by economists to estimate various economic indicators, from weekly Initial Jobless Claims to the monthly Nonfarm Payrolls report to the quarterly iterations of Gross Domestic Product. While some individual estimates would be spot on, the consensus forecast was almost always off the mark, even though this should represent the wisdom of crowds.
The April 1 issue of Bloomberg Businessweek included the story, “Why Are Economists So Bad at Predicting Recessions?” (https://www.bloomberg.com/news/articles/2019-03-28/economists-are-actually-terrible-at-forecasting-recessions). It cites research published in February 2019 that showed that, “of 469 downturns since 1988, the International Monetary Fund had predicted only four by the spring of the preceding year.” Private sector economists don’t have a better record, either.
The article suggests four reasons for the lousy batting average:
- It’s just hard to do. Data arrives with a lag and is incomplete. Sharp turns, which are common, are unpredictable. While the source of the quote is unknown, “predictions are difficult, especially about the future,” seems right on.
- Most economists don’t have money, per se, riding on their forecasts, “unlike portfolio managers.” The latter group don’t, to my mind, have a stellar forecasting record, either, incentivized though they may be.
- “Groupthink may also pose an obstacle,” as it’s safer if one’s estimate is within the range of the herd of economists.
- Someone famous—often John Maynard Keynes is cited—once said that he changed his mind when new information was available (“what, sir, do you do?”) Economists and other forecasters tend to ignore new information that disagrees with their forecasts. This is the ever-present confirmation bias.
The trouble is that, while economists may not have money riding on their calls, others may have money riding on their calls, namely investors. The local quasi-celebrity economist who speaks to a luncheon group may sound bright enough to influence the investment posture of luncheon attendees, possibly leading to inordinate caution or optimism.
I have, over the years, developed the annoying trait of saying, “I don’t know,” when clients or others who know of my business ask what I expect of the coming year. “No, really,” they say, “come on…” But I really don’t know. To pretend that I do or anyone else does is disingenuous and may do a great disservice to the one asking.