The verdict is in, the blue sky crowd has been too much in control in the world of economic forecasting.
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In fact, economists have been too optimistic in their economic growth forecasts for the last 16 years. Since 2000, economists have overstated GDP growth forecasts by a cumulative 14.9 percentage points, and were wrong in their forecasts 13 out of the last 16 years.
That is the bottom line of a new report card on economic forecasts from Goldman Sachs (GS). To do its tally on economic forecasting, the Wall Street investment bank compared what actually happened with the median forecasts from the Philadelphia Fed’s Survey of Professional Forecasters.
What Goldman’s analysis shows is that, once again, the collective wisdom of economists is little more than rearview mirror looking at last month’s economic data.
Not only did economists get it wrong on U.S. economic growth for 2015, but they also missed the larger than expected drop in the headline jobless rate; lower than expected inflation; and the number of rate cuts the Federal Reserve finally delivered, just one, “instead of the three that forecasters anticipated,” the new Goldman Sachs report says.
Another miss: “The widely-expected rise in long-term interest rates also failed to materialize, with 10-year Treasury rates ending the year little changed, in contrast to expectations for a 75 basis point rise,” Goldman says.
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But what’s most illuminating is the big fat F grade the forecasters got for being chronically wrong in their economic growth predictions, missing more often than not in the last sixteen years.
“Most strikingly, this year’s growth disappointment is the thirteenth in the sixteen years since 2000,” Goldman Sachs says, adding, economists still take “a significantly rosier view of potential than a reading of” output “and employment data might imply.”
Most economists—and Goldman admits that it includes itself in this camp—forecasted 3% U.S. GDP growth for 2015. Economists forecasted correctly steady consumer spending growth, which rose at a somewhat stronger-than-expected 2.7% rate in 2015, as well as solid spending on homes and government spending, which likewise moderately exceeded consensus expectations.
So what went haywire?
“The downside miss instead came from under-estimating the size of the drags from net exports and from energy sector capital spending cutbacks,” Goldman says. Meaning, no one’s crystal ball picked up a recession in the U.S. oil patch and how much the manufacturing sector was contracting.
However, though Goldman Sachs gave economists a C grade on inflation forecasting for 2015, it does say “inflation misses have been more balanced since the late 1990s, when inflation expectations became better anchored, though this year’s downside miss is the third in a row.”
Inflation “surprised on the downside in 2015, ending the year roughly a half a percentage point below consensus expectations,” the investment bank says. Economists missed the salutary effects on inflation from the drop in oil and commodity prices as well as the strengthening of the dollar.
Also, economists didn’t foresee “a larger than expected drop in medical services prices” in inflation as a result of payment cuts associated with the Affordable Care Act, Goldman says.
What’s ahead for 2016? More slow-motion growth. The U.S. economy is expected to grow at a 2.25% rate, the jobless rate could drop to 4.6%, while core inflation may rise just 0.3% to 1.6%, Goldman says. Based on data from the Minneapolis Federal Reserve Bank's recovery data base, the U.S. economy should be cranking out about $1.8 trillion more in economic output, if the U.S. was in what a recovery typically has looked like since World War II.
A gimpy recovery yes, but perhaps we can be happy the roof didn’t fall in—even though it’s propped up with a lot of taxpayer dough and Federal Reserve support.