Source: ECRI

 

The obvious answer is that extrapolation of current trends into infinity fails in any data set that is cyclical .

The Short Side of Long takes a swipe at the question, writing:

“The fact is, most economists are totally useless at predicting recessions. According to Variant Perception (I recommend reading their leading indicator economic research), “in the past four US recessions consensus forecasts did not recognise the recession even when recessions had already started.” The problem with economists and other academics is that they simply extrapolate data trends, as seen in the chart above. Variant Perception goes onto argue that the reason 9 out of 10 economists have failed to forecast the last several recessions is because economists focus on the wrong things. The two major reasons are:

• Focusing on lagging economic indicators (e.g. no use in tracking employment data)
• Focusing on incomplete / untrue data (e.g. almost all data is revised 3 & 12 months later)”

 

Hard to argue with any of that.

I have made my case over the years  . . .

 

Category: Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

7 Responses to “Why Are Economists So Bad at Forecasting Recessions?”

  1. A7LB says:

    Mr. Ritholtz,

    Will you please share with us your thought processes as you realized that a market correction was likely?
    Was it a sudden realization you had, or perhaps the logical conclusion to an evidence based study…

    Thanks.

  2. rd says:

    Why Economists Are So Bad At Forecasting? would be a much more appropriate headline. There is no need to restrict it to recessions.

  3. NoKidding says:

    “extrapolation of current trends into infinity fails in any data set that is cyclical “

  4. Roanman says:

    “The fact is, most economists are totally useless at predicting recessions.”

    That fact is, most economists are totally useless in general.

    There is a good reason for this. Most economists are paid for a specific point of view. This is true on both the right and the left. Krugman being the most prominent example of the guy making a living promoting the Keynesian lifestyle for Progressive talking points.

    In the Real Estate business there is a joke about MAI designated appraisers. Do you know what MAI stands for? Made As Instructed.

    The same principle is at work in Economics.

  5. I agree consensus estimates are a poor gauge of outlooks, but those economists who specialize in forecasting can successfully quantify forward-looking data and animal spirits to report major turns within 90-days of the episode.

    TRI charts: http://trendlines.ca/free/economics/RecessionIndicatorUSA/USA-TRI.htm

  6. moneyanxiety says:

    Barry,

    Your write up on inaccurate predictions by economists is right on the money. One of the points you mentioned is the fact they use soft data. I would like to add to that that in addition, they use conflicting soft data – here is an analysis I wrote on this phenomenon:
    You probably know the age-old paradox – you can’t be pregnant and not pregnant at the same time. Well, when it comes to consumer confidence, it looks like you can be both at the sometime. January’s consumer confidence results by the two major consumer confidence indices feature conflicting results.
    January’s Consumer Sentiment index, produced by Thompson Reuters/University of Michigan, reported an increase of 5.1 points from December, were as the Consumer Confidence Index, produced by the Conference Board, reported a decline of 3.7 points for the same month. Clearly, consumers’ confidence in the economy cannot be increasing and decreasing at the same time in the same place, which points to a deficiency in the concept of subjective surveys.
    The conflicting results in the January’s indices between the Thompson Reuters/University of Michigan Consumer Sentiment index, and The Conference Board Consumer Confidence Index, are rooted in their reliance on what consumers are saying rather on what consumers are doing, such as spending and savings levels. Such discrepancy occurs because people do not always say what they do, nor do they always do what they say. Hence, consumer confidence indices relaying on consumer responses are subjective, and are not as reliable as the Money Anxiety Index, which is completely objective because it is based only on real economic indicators.
    The methodology both “consumer confidence” incises use is fairly similar with a few exceptions. Both surveys include five core questions regarding current and future economic conditions, and both use a relative weight to each of the questions. The main differences between the two surveys is that the Conference Board uses a mail survey to about 5,000 households (although only about 3,000 respond), were as the Thompson Reuters/University of Michigan survey is done by phone to about 500 households.
    Surprisingly, many economists and analysts use such subjective indices as predictor to economic activities. In reality, it should be the other way around – use economic indicators to gauge consumer financial confidence much like the Money Anxiety Index.

  7. Dan says:

    Hello Barry,

    Your write up on inaccurate predictions by economists is right on the money. One of the points you mentioned is the fact they use soft data. I would like to add to that that in addition, they use conflicting soft data – here is an analysis I wrote on this phenomenon:

    You probably know the age-old paradox – you can’t be pregnant and not pregnant at the same time. Well, when it comes to consumer confidence, it looks like you can be both at the sometime. January’s consumer confidence results by the two major consumer confidence indices feature conflicting results.

    January’s Consumer Sentiment index, produced by Thompson Reuters/University of Michigan, reported an increase of 5.1 points from December, were as the Consumer Confidence Index, produced by the Conference Board, reported a decline of 3.7 points for the same month. Clearly, consumers’ confidence in the economy cannot be increasing and decreasing at the same time in the same place, which points to a deficiency in the concept of subjective surveys.

    The conflicting results in the January’s indices between the Thompson Reuters/University of Michigan Consumer Sentiment index, and The Conference Board Consumer Confidence Index, are rooted in their reliance on what consumers are saying rather on what consumers are doing, such as spending and savings levels. Such discrepancy occurs because people do not always say what they do, nor do they always do what they say. Hence, consumer confidence indices relaying on consumer responses are subjective, and are not as reliable as the Money Anxiety Index, which is completely objective because it is based only on real economic indicators.

    The methodology both “consumer confidence” incises use is fairly similar with a few exceptions. Both surveys include five core questions regarding current and future economic conditions, and both use a relative weight to each of the questions. The main differences between the two surveys is that the Conference Board uses a mail survey to about 5,000 households (although only about 3,000 respond), were as the Thompson Reuters/University of Michigan survey is done by phone to about 500 households.

    Surprisingly, many economists and analysts use such subjective indices as predictor to economic activities. In reality, it should be the other way around – use economic indicators to gauge consumer financial confidence much like the Money Anxiety Index.