Economists as Forecasters

Don’t get too worried about Greenspan’s forecast for the economy (whatever it is he said). In today’s NYT, Daniel Gross reminds us that economists have been awful predictors:

The Economist reported that in March 2001 — the month the last recession began — 95 percent of American economists believed that there wouldn’t be a recession. In February 2001, the 35 professional forecasters surveyed by the Federal Reserve Bank of Philadelphia collectively predicted growth at an annual rate of 2.2 percent for the second quarter of 2001 and 3.3 percent for the third quarter. It’s as if meteorologists stood outside as the storm clouds approached and informed television viewers that endless sunshine was ahead.

Maybe it’s not the economists’ fault. Perhaps predicting recessions is inherently impossible. To do it, you have to expect the unexpected:

Christina Romer, professor of economics at the University of California, Berkeley, says economists can’t predict recessions for the same reason stock market analysts can’t accurately predict market crashes. “Both kinds of events, by their nature, are not predictable events,” she said. Almost all the postwar recessions were preceded by a shock, like a spike in short-term interest rates, or a sharp rise in oil prices. “It’s impossible to see the shocks coming,” Ms. Romer said.

Posted by on March 4th, 2007 at 7:02 am


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