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The Truth Behind Economic Forecasts

Economic forecasts may influence buying behavior rather than predict it.

It seems as if the hopes of a recovery and economic activity rise every time a government agency or industry group releases another forecast or status update, only to return to a baseline a day or two later. Why is so much placed in reports that are mostly based on estimates and are presented as such?

 

Reports such as the weekly and monthly unemployment updates can inadvertently skew how the public perceives the current environment. Floyd Norris, writing for The New York Times' Economix blog, notes that the Bureau of Labor Statistics jobs report, issued last week, had some critics saying the better conditions were just a reflection of people leaving the labor force entirely.

Because BLS revised its population estimates (as it does every January) with more current census data but didn't adjust previous unemployment numbers to account for the new information, "there are big apparent changes that are not actually there."

"The funny thing about these economic forecasts is that they are treated as very reliable sources of information, but the fact is that economic forecasting is in its infancy," writes Len Burman, a Syracuse University professor, for Forbes.

He observes that positive data may serve to boost consumer confidence and drive them to spend, and this consequence is what drives recovery. Perhaps the analysis and predictions just become self-fulfilling prophecies.

Comments

Topic Expert
Barrett Peterson
Title: Senior Manager, Actg Stnds & Analysis
Company: TTX
(Senior Manager, Actg Stnds & Analysis, TTX) |

Economic forecasting tecniques have become mathematically elaborate, but continue to be fairly "rough", very dependent on a few assumptions, and predict fairly small rates for whici small errors have large impacts. Entertaining, but handle with care.

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