Friday, January 27, 2012

Navigating the economic forecasting mess

The ordinary observer could be forgiven for being very confused about the current economic outlook as forecasts and forecasters go up and down like yo-yo's. An example is this story from the Australian.

I discussed a little of this in an Armidale Express column, Belshaw's World - the economic version of the weather man. There are two issues on my mind.

The first is the misuse of forecasts and forecasting. The second is a very practical one: how does the ordinary business or individual navigate through all this mess?

In my Express column, I said in part:

Economic forecasting is a process whose role, is or should be, different from the actual numbers at any point. What is relevant is not the numbers themselves, but the way in which results diverge from the projections as they must.

Government and business have to make judgments about the future, about the likely impact of economic changes on their activities. Their needs are very different from those of market players betting on what might happen in the short term. Yet economic forecasts that are actually linked to and driven by the needs of market players have come to dominate the forecasting process.

Most prominent business economists work for financial institutions. Their primary internal role is to provide advice on what might happen in financial markets. The economic reporting that follows from their public utterances is also markets focused.

You see the problem.

I'm thinking of trying my hand at some practical advice here, in my new ABSM column or perhaps both, on navigation through this forecasting and reporting mess. You see, my feeling is that much of the forecasting and reporting should actually be ignored. 

1 comment:

Anonymous said...


Are you moonlighting for Ross Gittens?

When I read this I could almost swear I've read very similar things right here!