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This Week's Dunce Cap Award in Economic Forecasting Goes to...

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On January 30, the Commerce Department announced that the the U.S. economy contracted at a 3.8% annualized rate in the last three months of 2008. Yesterday, the same Commerce Department announced that actually the rate of decline for the fourth quarter at 6.2%.

Ooops.

The first report was off by almost half.

This was a report, mind you. An afterthought. Yesterday's mashed potatoes in comparison to the economic forecasts that populate today's media.

Mark Zandi is one of the big cheeses of this science. He is Chief Economist and co-founder of Moody's Economy.com, a division of Moody's Analytics, and often provides his forecasts to Congress. Yesterday he placed the odds of "a mild depression" at 25%.

Hmmm. Is a mild depression something that can be cured with a nice cocktail as opposed to prescription drugs?

Just 90 days ago, he put the odds of that "mild depression" at just 15% percent.

But hey, at the beginning of 2008 he announced that the "housing slump" would bottom out last summer. "Home-building can only go so low; house prices only need to fall so far until housing affordability is restored."

I have a friend in Vegas who would have loved to sell Dr. Zandi a very affordable house last summer.

But wait! Allen Sinai, Chief Global Economist, Strategist, and President of Decision Economics, Inc. forecasts a 20% chance of "a depressionlike possibility," up from 15% last week.

Note that Dr. Sinai is putting a number on the chance of a possibility of an event that would be depressionlike. And he is revising that number weekly. Brilliant.

Anyone have a definition of depressionlike? I googled it and got this: "Depression is like emotional quicksand. The more you struggle and fight to get out of it, the deeper you sink."

I wonder if Sinai read that?

Sinai has already won a number of forecasting awards, including Top Forecaster in the Wall Street Journal Survey in 2006, the USA Today Survey Top Forecaster in 2005 and 2003, and Top Guru in the Business Week Survey of 1997. So we should add this week's Dunce Cap Award in Economic Forecasting to the list.

2009-03-01-duncecap.jpg

Provisionally of course. Plus or minus some large number. We may have to revise that tomorrow. Depending.

The sad fact is that economic forecasting relies on complex set of assumptions that cannot be assumed in an economic crisis. The professional forecasters don't want to admit this, because they would then be out of a job (anyone want to forecast their chances of getting another job in the current job market?). So they continue to spout these meaningless numbers. And hey, they are straight white men with PhDs and big salaries, so who is going to complain?

In a crisis, metaphors may convey more truth than forecasts, and so I humbly offer this:

Pouring billions upon billions of tax dollars into the rescue of banks and car companies is like running a bath with the drain open. As long as the hot water holds out, you can convince yourself that you are actually running a bath. If your supply of hot water is infinite, you can maintain this fiction indefinitely. But if it runs out, we can safely forecast that your bathtub will quickly run dry, leaving you with no hot water and an empty bathtub .

On the plus side, the empty tub would be a suitable venue for the Dunce Cap in Economic Forecasting award ceremony.