The Problem with Projections
Last June, the Federal Reserve lowered its 2014 forecast for economic growth from 3% to between 2.1% and 2.3%, after data indicated that a particularly harsh winter caused U.S. gross domestic product to fall unexpectedly in the first quarter.1 The Fed’s quarterly economic forecasts, which influence interest-rate decisions, have been released to the public since January 2012. Fed officials believed greater transparency could help shape the expectations and behavior of investors, businesses, and consumers.2
Projections for economic growth, unemployment, and inflation are based on the opinions of members of the Federal Reserve Board (including Fed Chair Janet Yellen) and 12 regional Federal Reserve Bank presidents.
Economists in the public and private sectors are tasked with predicting the future based on a number of closely watched indicators, possible risks, and their overall impressions of U.S. market conditions. However, it’s not unusual for professionals to change their minds, because each new forecast takes updated information into account.
Polling the Pros
Many different types of organizations pick the brains of the world’s most powerful and influential economists on a regular basis. Surveys address major economic factors such as GDP growth, inflation, interest rates, and employment. The results are typically published as consensus forecasts, but may also highlight competing views.
Blue Chip Economic Indicators polls America’s top business economists, and the results are sold to subscribers in the form of monthly newsletters. The National Association for Business Economics (NABE) also surveys members about their outlooks and releases a public summary each quarter.
The Wall Street Journal’s Economic Forecasting Survey is a monthly poll of more than 50 economists. Many other news organizations, including Bloomberg and the Associated Press, also conduct periodic surveys of professional and academic economists.
Government agencies also take part in economic forecasting. The Congressional Budget Office (CBO) uses economic forecasts to help perform short- and long-term calculations related to the federal budget. In general, CBO projections are based on the assumption that the economy will continue to reflect historical trends and that fiscal policies will not change. The White House uses forecasts to measure the effects of its own policy proposals, usually to demonstrate their merits to Congress and the public.
Element of Surprise
What do the professional economists foresee for 2015? The mid-year 2014 consensus among forecasters was that economic growth would pick up speed. Even with this growth potential, inflation is expected to stay below the Fed’s stated target (2%), while unemployment will continue to decline (see table for projections).
Executives, policymakers, money managers, and others whose actions may depend on economic assumptions tend to pay close attention to the latest forecasts. But even though forecasting may be a common practice and a necessary aspect of decision making, there is no reliable method for predicting the future.
When viewing forecasts, it may be wise to keep their limitations in mind. Most forecasters refer to the same data sources, and economic models are based on past behavior that may not be repeated. Finally, it is difficult for economists to account for unexpected events, such as turning points in the business cycle, changes in oil prices, and severe weather.