Thursday, January 21, 2016

The Economy Is Underperforming Relative to Forecasts

This graphic shows the U.S. economy underperforming over the last several years.

16-01-20 WSJ Growth Forecasts

These graphics are getting more common, and can be hard to read.

The actual performance of the economy is the gray steps in the middle.

The colored bands are the forecasts made by a bunch of different forecasters. The color shows the year when they were made. The band go as far to the right as those forecasters predicted out into the future.

What we see is that:

  • In 2011, the gray bands forecast growth to be higher than it was in 2012 and 2013.
  • In 2012, the blue bands shows forecasts that are less optimistic than the previous year, and which still generally are too high for 2013-2015.
  • In 2013, the yellow bands show even more pessimistic forecasts, that are still to high. And so on for 2014 and maybe 2015.

There’s a couple of ways to look at this.

One is that the economy is underperforming. If that’s the case, the evidence we develop in class (as Case 5 in March) will show that this is because we continue to be hit by negative shocks. One negative shock after another is hard to reconcile with anything other than poor policy choices.

A second way is to view the forecasters as being systematically wrong. I’ll assert that we should dismiss this: individuals forecasters can be wrong, but groups of forecasters tend to do pretty well, so I’m incredulous that a bunch of them has been too high year after year.

A third way, and one which you need to be aware but which I am not encouraging you to put at the top of your list, is that the economy is fine but what we’re measuring is missing more stuff than it used to. Please go check out the post “What’s Wrong with America Right Now? Is It the Economy, or Is It Us?”, and pay particular attention to the Thanksgiving allegory given towards the end.

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