The Dismal Track Record of Economic Forecasts
The only function of economic forecasting is to make astrology look respectable.
Ezra Solomon and/or John Kenneth Galbraith.
The world economy is in crisis. Twenty million people are unemployed in Western Europe and the figure is rising. America faces two severe deficits – the federal budget and the balance of trade…
In this grim context, the opinions of economic gurus increasingly dominate business, politics and international affairs. Yet orthodox economics seems powerless to help.
Economic forecasters notoriously failed to predict the Japanese recession, the depth of the collapse in the German economy …
If this quote sounds like it was from 2009, it just shows how little changes in the accuracy of economic forecasting. In fact, it is from the introduction to the 1994 book “The death of economics” by Paul Ormerod (published by Faber & Faber Limited).
Not for the first time, the 2008/09 Global Financial Crisis (GFC) exposed the profession of economic forecasting as being as reliable as astrologers. Chart 1 shows the sequence of average forecasts for 2009 from their panel of economists (they are polled each month).
As late as September 2008, there were no signs that economists expected anything other than a mild slowdown in the advanced economies. But two months later, they were predicting recessions: and they became ever more pessimistic until mid-2009.
William A. Sherden, in his book “The Fortune Sellers” (published by John Wiley & Sons in 1998) analyses the forecasting skills of several professions, including weather forecasters, futurists, and economists. In the case of economists, he reviewed the leading research on forecasting accuracy contained in twelve studies published during the period 1979 to 1995 and covering forecasts made during the 1970 to 1995 period. His conclusions were:
Economists cannot predict turning points in the economy;
Economic forecast accuracy drops with lead time;
Economists’ forecasting skill on average is about as good as guessing;
There are no economic forecasters who consistently lead the pack in forecasting accuracy;
There are no economic ideologies whose adherents produce consistently superior economic forecasts;
Increased computer model sophistication provides no improvement in economic forecast accuracy;
Consensus forecasts (more correctly averages of forecasts) offer little improvement;
There is no evidence that economic forecasting skill has improved over the past three decades.
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