Economists Strive For Better Forecasting Regime

Economists have almost as much trouble making sense of the past as they do in their fundamental role of forecasting the future path of the economy. Analysts are endlessly confronted with data that are subject to frequent revision, says Michael S. Derby.

These shifting numbers put forecasters in the position of having to base their projections on data that could well change, in an exercise akin to building foundations on mud. This is one reason for the deep conservativism of the National Bureau of Economic Research, the official “daters” of business cycles. Its desire to possess the most definitive data possible leads it to peg the starts and ends of recessions long after the turns have happened.

The issue isn't academic. Most economists and policy makers believe the worst recession in generations is now over, but the NBER has yet to ratify that view, creating some confusion in the wider public about the economy's true state at a time of low growth and persistently high unemployment. That has an impact on confidence levels, and it also has political dimensions.

But while forecasting is beset with frustrations and difficulties, this hasn't pushed Fed officials away from an ever-greater emphasis on forecasts as a key part of the monetary policy-making process. Fed officials say their forecasts give greater insight into how interest rate policy will play out.

Read more…