Economic Forecasting: How Good Are Economic Forecasts?
September 23rd, 2009
Economists come under pressure from investors when their forecasts miss the mark. And justifiably so. Aust analysts CommSec have looked at the performance of economic forecasters in estimating 77 indicators over 2009. The top five forecasters over 2009 so far are UBS, Westpac, CBA, Goldman Sachs JB Were and ANZ. But the rankings change dramatically when looked over the past month or past three months.
A good approach for investors is to follow the consensus. An average of the 20 forecasters consistently outperformed the majority of individual forecasters over differing time periods. Of the 77 indicators tracked, the consensus economic forecast picked the direction of movement 78% of the time. And on 60% of occasions the consensus result was amongst the top forecasts. But this doesn’t mean to say following the consensus economic forecast is fool-proof. For some indicators all were wide of the mark in their predictions during 2009.
Of course, forecasts are just forecasts. They are attempts to define the unknowable. For much of the regular monthly data releases there isn’t much anecdotal or partial information on which to base the forecasts. While investors constantly ask whether economists are successful in making forecasts, unfortunately the answer can never be objective and depends on the time period of analysis.
But while the performance of economic forecasters is reasonable, there is always room for improvement. Investors, traders, borrowers and businesses rely on good forecasts to assist with planning and decision making. It is right economists are subjected to scrutiny when their forecasts do go awry.
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