Center for Business and Economic Research - Ball State University


CBER Data Center
Projects and PublicationsEconomic IndicatorsWeekly CommentaryCommunity Asset InventoryManufacturing Scorecard

About

Commentaries are published weekly and distributed through the Indianapolis Business Journal and many other print and online publications. Disclaimer

RSS Feed

Disclaimer

The views expressed in these commentaries do not reflect those of Ball State University or the Center for Business and Economic Research.

Recent

More Changes to Economic Development Policy Are NeededThe IEDC board should consider whether they should be picking winners and losers in both business attraction and location.

We Have a Healthy Middle ClassThe biggest issue in the middle class involves changes to consumption, not earnings.

Economic Freedom Is Essential, but It Isn’t Just TaxesBusinesses and households prioritize standard of living among other factors.

The Labor Demand Shocks of Artificial IntelligenceThe unseen part of technology is how humans adapt it to complement their innate skills.

View archives

Top Tags

jobs and employment 265
economics 205
state and local government 190
education 190
indiana 176
economic development 174
budget and spending 148
taxes 147
law and public policy 146
workforce and human capital 142
Browse all tags
Reporter / Admin Login

December 31, 1969

Integrity and Accuracy in Economic Forecasts

For those of us with the audacity to publish economic forecasts, it has been a bad couple of years. It may be best to begin with a look in the mirror. In December 2008, I forecast the US and Indiana economy shrinking throughout the coming year, with job losses and declines in all sectors except healthcare. I also said that the economy would hit bottom in the summer of 2009, but that recovery – especially in the labor market – would be slow. In December of 2009 I repeated this exercise, predicting slow growth in everything but the labor force beginning last winter. So how’d I do?

I am pleased to say my timing of the turnaround and the relative decline in each sector appears to have been nearly spot on. Sadly, I did a wretched job of estimating the depth of either jobs or income losses here in Indiana. My estimates on income declines were off by half, and job losses the same. The timing is important, but the depth of the decline is far more critical. It is small comfort that I am not alone. The Presidents Council of Economic Advisors, as fine a group of economists as you’ll find, did worse. They forecasted current unemployment rates to be roughly 3.5 percentage points lower than they are now. So what next?

A New York Times columnist recently wrote about the issue of economic forecasts, arguing that economists would soon do away with their models. That was precisely wrong. Instead we are going back to the models, keeping the parts that work and remedying the errors. My forecast contains about 125 equations which rely heavily on the experience of recent history. This recent history predicted a more modest downturn than we had. I’ve already rewritten the models to incorporate a longer memory. I hope to get it better next time, and I am sure I am not alone. But that begs the question, just what should economists be expected to know and how should we explain it? I think that there is one easy principle: honesty. We ought to be honest about what we do and do not know, and how prone to error an estimate might be. This last part is the most difficult to communicate. We could do like weather forecasters and give probabilities, but that doesn’t make public budgeting any easier. Perhaps we shouldn’t say the unemployment rate will be 9.5 percent, when we really mean it will be between 9.1 and 9.9 percent.

We can forecast things like the annual labor force, population, house hold income for broad regions with great certainty. The smaller the region and the longer the time horizon the less certain are forecasts. Partly this is because data is less accurate and available for small places, but also small regions suffer more random changes, which are devilishly hard to model. Ironically, the things we wish to know with the most certainty are often the things we can forecast the least well. Just like the weather.

Link to this commentary: https://commentaries.cberdata.org/522/integrity-and-accuracy-in-economic-forecasts

Tags: forecast, economics


About the Author

Michael Hicks cberdirector@bsu.edu

Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University. Note: The views expressed here are solely those of the author, and do not represent those of funders, associations, any entity of Ball State University, or its governing body.

© Center for Business and Economic Research, Ball State University

About Ball State CBER Data Center

Ball State CBER Data Center is one-stop shop for economic data including demographics, education, health, and social capital. Our easy-to-use, visual web tools offer data collection and analysis for grant writers, economic developers, policy makers, and the general public.

Ball State CBER Data Center (cberdata.org) is a product of the Center for Business and Economic Research at Ball State University. CBER's mission is to conduct relevant and timely public policy research on a wide range of economic issues affecting the state and nation. Learn more.

Terms of Service

Center for Business and Economic Research

Ball State University • Whitinger Business Building, room 149
2000 W. University Ave.
Muncie, IN 47306-0360
Phone:
765-285-5926
Email:
cber@bsu.edu
Website:
www.bsu.edu/cber
Facebook:
www.facebook.com/BallStateCBER
Twitter:
www.twitter.com/BallStateCBER
Close