The quality of economic forecasts - never better

The quality of economic forecasts have never been better which means they continue to be lousy If progress in economics is related to our ability to make good forecasts we have declined in our knowledge. The undercover economist, Tim Harford, has written about this issue although any close observer of the markets knows that professional forecasters are poor. Harford uses the work of IMF economist Prakash Loungani as a starting point for analysis. He looks at forecasting through the 1990's and found a clear prediction, economic forecasts were bad. He has now updated that work and looked specifically at the ability of economists to predict the recession of 2009. None were able to do it. Zero were able to predict a recession for 2009 even at September 2008. Now that is some record. A chart of the forecasting skill is presented below.

Recessions are rare events and turning points are always hard, but economist have no luck on catching these big events. We often come back to the same old best forecast of using today to predict tomorrow. The current as the best guess of the future is not very satisfying because turning points will be difficult and there really is no prediction. It is just a rule to act on what is in front of you today. 

This is why a have always been biased toward systematic rules. If the trend starts to decline, follow the momentum. Take signals from the market. It may not be overly sophisticated but it will get you in the right direction. If you want to add a little extra, use some conditional forecast based on current conditions. I always like say that the first issue is determining where you at. The second issue is determining what the crowd is doing or the trend. The least important is following the experts who often do not have money on the line with their forecasts.