The Illusory World of Economic Forecasting

Paul Farrell (who’s been on an angry tear lately) states what we have all known for quite sometime: Economists make awful forecasters. Farrell calls it "the illusory world of economic illusionists."

We’ve discussed this issue several times in the past: 1) in general with The Folly of Forecasting; and B) specifically, with The Mystery of the Awful Economists.

William Sherden did research on the accuracy of leading forecasters over a few decades, and his findings were summarized in his book "The Fortune Sellers: The Big Business of Buying and Selling Predictions." And his conclusions are still accurate: 

"They are timeless. The political influence on predictions is basic human nature. I see no way that economic forecasting can improve since it is trying to do the impossible."

Here are Sherden’s top 10 findings in The Fortune Sellers:

1. The forecasting skill of economists is on average about as good as guessing. In fact, predictions by the politically driven Council of Economic Advisors, Federal Reserve Board and Congressional Budget Office were often worse than guessing.

2. Economists cannot predict the turning points in the economy. Of 48 predictions made by economists, 46 missed the turning points.

3. Economic forecasting accuracy declines with longer lead times.

4. No economic forecasters consistently lead the pack in accuracy.

5. No economic ideology consistently produces superior forecasts.

6. No economic forecaster has consistently higher forecasting skills predicting any particular economic statistic.

7. Consensus forecasts do not improve accuracy (although the press loves them).

8. Psychological bias affects forecasters and their forecasts. Some economists are naturally optimistic and bullish, others are consistently pessimistic bears.

9. Increased sophistication provides no improvement in forecasting accuracy. Remember the Long-Term Capital Management hedge fund? Two brilliant Nobel Economists backed by Wall Street’s elite nearly sabotaged the world economy.

10. Finally, Sherden says there’s no evidence that economic forecasting has improved in recent decades. In fact, forecasting appears to be deteriorating as partisan politics, Wall Street gaming and unpredictable global events invent new illusions.

The one caveat I would add to this is I have found ECRI to be consistently useful as an economic analysts, along with ISI and NDR. They help discern objective reality, rather than make forecasts per se.

Good stuff, Paul.

>

Source:
America’s ‘Hollywood economy’
Paul B. Farrell, MarketWatch
Marketwatch, 7:23 PM ET Sep 18, 2006
http://tinyurl.com/qxc7a

Category: Data Analysis, Economy

Why do Music CDs Fail to Compete on Price?

Category: Economy, Music

Homebuilders Index Falls to lowest level since 1991

Category: Economy, Real Estate

S&P 500 Homebuilders Index Review

Category: Investing, Markets, Real Estate, RR&A

What might make me more bullish?

Category: Economy, Investing, Markets, Psychology, RR&A, Technical Analysis

FTSE CNBC Global 300 Index

Category: Financial Press, Markets, Media, Psychology

The Technical Dilemma

Category: Federal Reserve, Investing, Markets, Technical Analysis

Linkfest

Category: Web/Tech

Statistical Mistakes Traders Make

Category: Psychology, Trading

What’s Really Propping Up The Economy?

Category: Data Analysis, Economy, Employment