Then consider private consensus. Economists surveyed in December in the Livingston Survey of the Federal Reserve Bank of Philadelphia downgraded projections made just six months earlier, estimating that real GDP in the second half of this year would grow at an annual rate of just 2.5%, not 3 , 2%. For the first half of 2012, they expect an increase of only 2.1%, against 3.0%. These forecasts could of course rise again, but could also easily fall.
More troubling, the forecasts of the Fed and private economists have been far from reality in recent years. For example, in December 2007 – when the Great Recession began, as we now know – most economists inside and outside the Fed thought the economy was still growing. Livingston economists at the time predicted real GDP growth of 1.9% in the first half of 2008, with a jump to 2.8% in the second half. Fed staff economists made a similar forecasting error, as Simon Potter, director of economic research at the New York Fed, documented in a recent blog post.
Perhaps even more worrying is that on June 9, 2008, in the midst of what would be the longest and deepest recession since World War II, Ben S. Bernanke, the chairman of the Fed , said he believed conditions were improving. Remember, Mr. Bernanke is a distinguished economist with a wide range of information. Still, he told Boston: “The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so. In fact, the housing crisis was worsening and the financial system and economy would soon collapse.
Part of this is quite understandable. After all, even predicting tomorrow’s weather is risky. Is it going to rain? Will there be melted snow? Will it snow? Often we don’t know until the last second. Why should policymakers accurately predict the combined behavior of millions of people and businesses in a complex, global economy, months in advance? Give them a try, but maybe it shouldn’t come as a surprise if the effort often seems like little more than a highly educated guess.
What is perhaps less obvious is that it is not just predicting the future that is difficult; measure the economic activity that has already arrived is a Sisyphean task. A seemingly simple benchmark like quarterly GDP growth rate is published and revised seven times by the Bureau of Economic Analysis. These revisions are sometimes significant, especially at turning points in economic growth.
“When you forecast on a changing baseline it can be very, very difficult,” office manager Steve Landefeld said in a telephone interview last week. Brent Moulton, an associate director, explained that GDP is a statistical compilation of data from about 200 surveys from 38 federal agencies, as well as a myriad of private reports. The numbers are changeable.