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

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.

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.

Comments

[AdamGordon]

As you say: "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, ... they continue to spout these meaningless numbers... so who is going to complain? Well, the complaining does go on - and ridiculing of forecasters goes on (witness many failed prediction) websites, but the problem is elsewhere: it is that people need to see the future to make better decisions, and some forecasts are great, so they grab at the meaningless numbers because they can't tell the difference between a good vs bad forecast. I've written a book which plugs this gap - it's a business or policy manager's guide to *critically evaluating* what the media, consultants, investment brokers, industry analysts and other gurus and talking heads are saying about the future. (Future Savvy, Amacom Press, 2009.) See also critical approaches in foresight at http://www.futuresavvy.net

[cylindar]

Yes, I like the bathtub thing. Basically the US government is bailing out people and the government has no money to really bail people out with. This is where I really get confused because they want me to think they are doing something with something they don't have. This is bigger than any Wall Street scam. I wonder how long it will take people to figure this out? Hey folks the gov't. is broke!

[cam]

Actually, it is even worse. The money isn't just being used to bailout people, its is being diverted into private pockets. http://www.huffingtonpost.com/cenk-uygur/the-flaw-in-the-system-th_b_170963.html

[BGNC]

Don't tell me he gets paid a salary to do this! That's like the weatherman who gets paid to guess. I could handle that job! Are there any openings?

[ocinemod]

Excellent! On the money! Errrrrrr......
You broke the bank with this one Bob!
Of course we could all do with that bath after the foul ooze that's settled on the country following Reagan, Bush times 2 and Clinton. There's a pronounced smell of Cheney in the air.

[HeevenSteven]

So what exactly do you need to cork up the drain?

[magen]

In order to get the job of "forecaster' don't you have to have a track record of getting things right????

These people always get it wrong and their ulterior motives are on full display for anyone who wants to look.

I wish I could do everything wrong in my job and still have a job.

The corporate practice of rewarding incompetence needs to stop now.

Showing up and being a "yes man' doesn't make you an expert at anything.

[LiarLiarIraqsOnFire]

Add the crashing global economy to the list of things the people in charge 'Could Not Have Foreseen".