Macroeconomic Forecasts: Brought to You by Your Favorite Economic Weather Station

By: Eduardo R. Zayas-Quiñones

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Abstract: This paper describes and contrasts the economic reason that supports macroeconomic forecasts prepared and published by different financial, government and political organizations for the next two years. The paper also evaluates inherent bias in macroeconomic forecasting and the implication of these forecasts on three planning issues identified by my company for the next two years.

A Thousand Miles Above the Earth: Commercial, government and political organizations like hovering satellites a thousand miles above earth look upon the economy below assessing through their bird-eyed lenses trends and patterns in microeconomic weather behavior below, seeking to predict how all of these will pan out in terms of the overall economy over the coming years. While the view from above is similar to all these economic reporting stations out in space, their geo-synchronous orbits are different, offering a slightly different perspective of the economic patterns below, resulting in different opinions of how the economy will behave in the future. Because of their unique view of the economy rather than reporting with consensus our "Macronauts" tend to report from their own macrocosmic perspective. Although sometimes delivered with fair accuracy, most of the time their forecast leaves us puzzled just as a weather forecast predicting a 50% chance of rain.

Macroeconomic Sources or What Color is Your Macroeconomic Lens: Five economic indicators were chosen out of a dozen or so in order to compare and contrast economic forecasts by four economic organizations the Research Seminar in Quantitative Economics (RSQE) by the University of Michigan, the Department of Commerce Congressional Budget Office (CBO), The Conference Board, the national 2004 budget and finally Blue Chip Consensus, a survey of 50 economic forecasters (see Table-1). These represent views on the economy from academic, government and commercial perspectives.

Laster et al in their article "Rational Bias in Macroeconomic Forecasts" suggest that bias exists in how certain analysts come up with their economic forecasts. The article authors argue that while consensus already exists in economic forecasting some forecasters "consistently predict outcomes that are extreme relative to other professional forecasts" suggesting that when making their projections these individuals "act according to goals unrelated to the pursuit of accuracy." The premise for such behavior is that compensation, acceptability, reputation, publicity, rationality and extension are motivating factors that can impact on the accuracy of a forecast.

Macroeconomic Indicator Analysis - the following macroeconomic indicators are contrasted: Real Gross Domestic Product (GDP) is used by economists to monitor economic growth, Hall and Lieberman (2002). Real GDP measures the total quantity of goods and services produced in our country over one year. The first economic unit of measure in this paper is Real GDP Percentage Change. This means how much more or less we produce new products and services from one year to the next. In Figure-1, the 2004 Budget figures are based on Administration policies, initiatives and their forecast of how the impact of these will affect the economy in the long run. In this case a combination of publicity, acceptability and rationality could be at play in their high combined estimate of Real GDP for 2003 and 2004. Blue Chip as mentioned previously is an average calculated from forecasts provided by 50 or so large companies. I believe they tend to be on the higher side of the scale because these are the major users of forecast information and as such both popularity and compensation aspects could be of influence to their individual forecasters.

Consumer Price Index (CPI) is a measurement of the prices paid by the consumer and normally indicates inflation or deflation in the economy. It combines all the prices of items a costumer consumes through weighed averaging to tell us overall how much the price of these will increase over a year's period. Note here that the forecasts provided by The Conference Board are in most cases rather conservative. I attribute that to the fact that they are a private non-profit organization and have very little economic interest other than perhaps acceptability and publicity - these will not be achieved with extravagant or inflated forecasts.

Unemployment Rate is the percentage of the population who would like to work but cannot find jobs. This is an indicator of economic growth in terms of labor needed to sustain increases in productivity. Did you notice how low the budget allocation is for 2003 and 2004 unemployment? Clearly, the administration believes that their economic policies will reduce the unemployment rate. The CBO seems to be in agreement with the Administration on this issue. Perhaps this is a reflection of the majority rule by the Republican Party.

Three-Month Treasury Bill Rates and Ten-Year Treasury Bonds are promises to pay back money borrowed by the government at interest. In achieving equilibrium the money market experiences changes in supply and demand often based on excess supply of money. As the price of bonds decreases based on higher interest yield, the market sees this as an indicator that interest rates are about to lower. Notice that throughout Table-1 the Research Seminar in Quantitative Economics (RSQE) by the University of Michigan has shown a conservative approach and almost seem to average the estimates provided by other economic sources. I suggest that like the Conference Board, their interest is from an academic perspective and perhaps less prone to be influenced by some of the factors that influence many other economic forecasters.

Operational and Planning Recommendations: After examination of the macroeconomic forecast by these organizations I have drawn two conclusions. First, that there will be an increased supply of labor in the market - my company needs to make sure that there is sufficient work to provide for them. This also means the company must increase its capital stock and because the company is engaged in high-end technical service industries a great way to invest would be in training and technology. Second, through examination of Bills and Bonds and the expected drop in interest rates I believe that our economy is ready to take off in the next year or so. In this regard I believe my company should revitalize its marketing operations to make sure as new business becomes available that it can secure a large portion of its market.

Conclusion: Indeed, there are several sources of macroeconomic forecasting and each of these provides us a view of the forecaster's own macrocosmic view and ideology. When using these to make business or economic related decisions one must look at several available resources to better understand our economic future and be able to make intelligent and well informed decisions.

 

Real GDP

Consumer Price Index

Unemployment Rate

3 Month T-Bill

10 Year T-Bill

 
 

2003

2004

2003

2004

2003

2004

2003

2004

2003

2004

CBO

2.5

3.6

2.3

2.2

5.9

5.7

1.4

3.5

4.4

5.2

The Conference Board

2.3

4.1

2.3

1.9

5.9

5.4

1.0

1.4

4.0

5.2

Blue-Chip

2.8

3.6

2.3

2.2

5.9

5.5

1.6

2.9

4.4

5.2

RSQE

2.2

3.7

2.1

2.2

5.9

5.7

1.2

1.9

4.0

4.1

2004 Budget

2.9

3.6

2.2

2.1

5.7

5.5

1.6

3.3

4.2

5.0

Table-1: Macroeconomic Forecasts for 2003 and 2004

References:

Hall & Lieberman (2001) Introduction to Economics, 1st edition [University of Phoenix Print Version]. South-Western College Publishing, OH: Thomson Learning Inc.

CBO's Current Economic Projections: http://www.cbo.gov/

The U.S. Economic Outlook for 2003-2004, Research Seminar in Quantitative Economics, University of Michigan: http://rsqe.econ.lsa.umich.edu/forecast/summary.html

Bayesian VAR Forecasts Fail to Live Up to Their Promise, Charles W. Bischoff et al, Business Economics, July 2000

Assessing the Soothsayers: An Examination of the Track Record of Macroeconomic Forecasting, Mark R. Greer, Journal of Economic Issues Vol. XXXIII No. 1, March 1999

The U.S. Economic Forecast, The Conference Board: http://www.conference-board.org/economics/stalk.cfm

Bank of America Economic and Financial Perspectives, Mickey D. Levy et al, Vol. 14, No. 2, February 14, 2003

Economic Update, House Budget Committee, Volume 2, Number 1: http://www.house.gov/budget/

The Rational Bias in Macroeconomic Forecasts, Laster et al, Quarterly Journal of Economics, 00335533, Feb 99, Vol. 114, Issue 1

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