How Good Are Economic Forecasters?

Not very good according to Martin Fridson. He looked at the median GDP forecast of some 60 professional forecasters.

The median prediction was in the range of 3.1% to 4.0% in every single quarter. Perhaps not coincidentally, the actual quarterly GDP increase over the past 25 years (1981-2005) averaged 3.14%. The forecasters, in aggregate, perennially thought that one year hence, business conditions would be just about average. In reality however, actual GDP gains gyrated between 0.2% and 7.5%. The forecasters’ nearly inert consensus was all but worthless.

It seems that no matter what happened, the economists always believed in reversion to the mean. Fridson concludes:

The imprecision of economic forecasts isn’t a comment on the forecasters’ intelligence or work ethic. Rather, it demonstrates that the economy is too complex a system to be adequately captured by existing modeling techniques. The rational response to this realization is a combination of caution and humility.

Posted by Eddy Elfenbein on September 8th, 2006 at 9:52 am

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