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The Limitations of Economic Forecasts – “The Signal and the Noise: The Art and Science of Prediction”, Nate Silver

November 19th, 2012 · No Comments · Economics, Policy, quote

Instead, economic forecasts are blunt instruments at best, rarely being able to anticipate economic turning points more than a few months in advance. Fairly often, in fact, these forecasts have failed to “predict” recessions even once they were already under way: a majority of economists did not think we were in one when the three most recent recessions, in 1990, 2001, and 2007, were later determined to have begun.

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In reality, when a group of economists give you their GDP forecast, the true 90 percent prediction interval—based on how these forecasts have actually performed20 and not on how accurate the economists claim them to be—spans about 6.4 points of GDP (equivalent to a margin of error of plus or minus 3.2 percent).* When you hear on the news that GDP will grow by 2.5 percent next year, that means it could quite easily grow at a spectacular rate of 5.7 percent instead. Or it could fall by 0.7 percent—a fairly serious recession. Economists haven’t been able to do any better than that, and there isn’t much evidence that their forecasts are improving. The old joke about economists’ having called nine out of the last six recessions correctly has some truth to it; one actual statistic is that in the 1990s, economists predicted only 2 of the 60 recessions around the world a year ahead of time.

 

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