On the occasion of yet another downward revision in growth numbers, this time out of the U.S., it’s a good time to take a quick survey of recent writing that just so happens to focus on the penchant among economists and the U.S. Fed to over-estimate growth predictions.
First up is the highly respected John Mauldin of Mauldin Advisors, no doomsayers by any means. However, his recent review of the literature and of Fed statements (which raised the ire of at least one economist), and of the economic profession’s dismal forecasting record, led him to plead: “[W]e do not ask economists to forecast the precise location of the economy a year hence. Just getting the direction (north or south?) right would be a good start.”
He added, “If you think the Fed or government agencies know what is going on with the economy, you’re mistaken. Government economists are about as useful as a screen door on a submarine. Their mistakes and failures are so spectacular you couldn’t make them up if you tried. Yet now, in a post-crisis world, we trust the same people to know where the economy is, where it is going, and how to manage monetary policy.”
To be fair, the record of the private-sector economists making up, say, the Bloomberg panel, is evidently no better.
Over at the Washington Post, no words were minced either. “This graph shows how bad the Fed is at predicting the future,” declared the headline. Here is the Post‘s graph of the Fed’s economic projections and some of the accompanying text:
“As you can see above, in 2009 the Fed was predicting 4.2 percent growth in 2011. Awesome! But then in 2010 it revised that down to 3.85 percent growth. And in 2011 they revised it further to 2.8 percent growth. And when all was said and done, the economy only grew about 2.4 percent that year. The Fed projected growth almost twice as fast as what actually happened.”
(And no, before you ask, the record didn’t improve in 2012, etc. And no, forecasting by international organizations like the IMF has been no better. It’s typically optimism with no basis in reality. The backtracking between here and here is kind of funny. Kind of.)
Finally, Lee Adler of the Wall Street Examiner tore a strip (well, “flaying alive” might be the better descriptor) off the Fed. He simply compared forecast data to actual data to show that not only has the Fed almost never made a correct forecast, but it fails to correctly identify even present conditions. He drilled down in considerable detail for the years 2007-2010 to show that the Federal Open Market Committee simply hasn’t been anywhere near accurate.
How is it possible to be this wrong, this often and by so much? At best, it begs the question, why does anyone listen to these folks anyway? At worst it lends credence to the argument that, contrary to received wisdom, central banks are in fact political actors rather than neutral custodians. Which is to say they are engaged in a kind of forward-looking cheerleading for their respective national governments. That may or may not be good, but it would be nice, if not necessary, to know either way.
The bottom line is first quarter GDP growth in the U.S. was revised down to 1.8% from 2.4%—an incredible 25% miss—for annualized growth of 0.4%. And bear in mind that this growth is with the effects of the easiest money policy ever seen in history. Good luck to us all when and if that spigot is turned off.
When will we confront the reality that something about our economy is fundamentally broken so that we can actually begin to do something about it?