NABE presidential address: business economists, forecasting, and markets - National Association of Business Economists - Transcript

Business Economics, Jan, 1992 by Richard D. Rippe

Business economists are again concerned

about the current status and the future of

the profession. A review of the past

forecasting record provides mixed results: GNP

and inflation forecasts better than "no

change," interest rate forecasts less

successful and corporate earnings estimates

consistently too high. But business

economists also possess a variety of skills useful

in nonforecasting activities: assesment of

markets and policy issues, as well as

obtaining data and analyzing it. The paper

concludes with a number of suggestions for

dealing with the business economists' image

problem.

ALTHOUGH OTHER OBSERVERS might reach a different conclusion, it is my belief that business economists are plagued with a new round of anxiety about the standing of our profession and, to be frank about it, new concerns about job security. It is fair to note, of course, that several other professions have suffered through their own traumas in recent years as well. I wish to explore the validity of these self-doubts, in particular the part that emanates from our forecasting prowess and performance.(1) Then I will offer both a few suggestions about how we can deal with the image problem that remains and also a few suggestions about how we should conduct our affairs.

THE SITUATION IS NOT SO BAD

Before we delve into the forecasting issues, however, we should emphasize that there is good news inherent in some of our industry facts: Some evidence suggests that the profession is doing better than the undercurrents of doubt reveal.

For one thing, membership in NABE has been on an upswing. After rapid growth in the 1960s and early 1970s, regular membership (i.e., nonstudent) reached a peak in 1983 of 3,491 and then declined for four years to an interim low of 3,059. Membership has since recovered to 3305 at the end of 1990 and has held at about that level in 1991.

In addition, the interest of the media in analysis of economic and business affairs has never been greater. Our profession is constantly sought out to provide insight into major international, national, and industry developments.

ECONOMIC FORECASTING: HOW ARE WE DOING?

I will not attempt a thorough evaluation of our forecasting performance; that task has been undertaken by others.(2) I will draw upon their work, update the record to recent years, and add a few observations of my own. I will draw primarily upon consensus forecasts -- the mean or median of a group of forecasters -- because my focus is on the performance of the profession. The examples will have to be selected from variables that are primarily macroeconomic because these are the only ones for which a fairly long and consistent record of forecasts is available.

GNP and Inflation Forecasts. Let's begin with what are probably the most visible forecasts, at least from the viewpoint of the general public -- GNP (adjusted for price change) and inflation (here as measured by the Consumer Price Index).

A charge often made is that economists have had major difficulty with their predictions near turning points, i.e., forecasting the onset of recession (often failing to predict its arrival) and the ensuing recovery (typically underestimating its strength). A defense that can be offered, of course, is that the average of cycles in the postwar period shows fifty months of expansion and eleven months of recession, so more than 80 percent of the time has been spent in the expansion phase. If a forecaster warns of recession too frequently, the evidence against this view will be known quite soon. (Paradoxically, right now users of forecasts seem more willing to excuse an erroneous forecast of an imminent recession than one that mistakenly calls for continued advance in economic activity.)

But because forecasts are prepared and used on a regular basis, turning points are only part of the story. The usual forecast questions are: How much real growth (or decline) is the economy going to experience? How much inflation (or deflation) are we going to have? Historical records of consensus forecasts are available for several groups, and for current purposes we will look at two of them: our own NABE forecast (prepared for release at our annual meeting, based upon July/August forecasts) and Bob Eggert's Blue Chip (BC) forecast (taken from the October edition of his monthly survey). The difference in timing between the two surveys is one to three months, depending upon the forecaster. This might seem to be a small matter, but if economic conditions are changing rapidly, the extra information supplied by several additional observations on key indicators can be important.

For the annual average change in real GNP, the following table provides summary statistics on the errors of the two panels:

Table 1

Error Statistics for Real GNP Forecasts

Made for the Year Ahead for 1977-90

Statistic                 NABE   Blue Chip
Average absolute error    1.1%     0.9%
Root mean squared error   1.8%     1.5%
Theil's U Statistic       0.5      0.4%

The average absolute errors are near 1 percent and look reasonably favorable,(4) given the observed range in the actual result (i.e., -- 2.6 percent to 6.8 percent). Relative to the average absolute change of 3.2 percent, these results may not seem impressive -- a 34.3 percent error for NABE and 28.1 percent for BC -- but there must be some recognition of volatility. Some analysts prefer the root mean squared error (RMSE) because the squaring operation places a heavier weight on the large errors. The accuracy is somewhat worse on this statistic, as illustrated in the table.(5)