The Folly of Economic Forecasting

Apr 2014 //
Economics

As a practicing economist, I would like to emphasize that the considerable power of economics is in understanding how the economy works and how consumers and businesses react to various situations and incentives, not in short-term economic forecasting.  Indeed, there is no body of economics experts with more data, experience and insight than the Federal Open Market Committee (FOMC), yet transcripts of FOMC meetings in 2008 make it clear that virtually nobody accurately foresaw the coming financial crisis.  Moreover, among the numerous private economic forecasters, even the perma-bears failed to anticipate the severity of the 2007–2009 recession.  Among the FOMC members known as “hawks” (those who maintained that little Fed intervention was necessary), their too-rosy expectations for the U.S. economy proved to be the furthest off the mark.  Interestingly, among the FOMC members who seemed to best understand the realities of the recession was Janet Yellen, the current Chair of the Fed’s Board of Governors.