Why Are Mainstream Economic Forecasts So Often Wrong?

In the past nine years we have seen important improvements in economic forecasting. Some investment banks have stepped out of their historical role of painting rosy outlooks where next year is always a “this time is different” story, and we have seen a more realistic approach. Unfortunately, there is still an eyebrow-raising tendency to end global outlook reports with the same recommendations every year: carry-trade your way into the next twelve months.

International bodies have also improved. We have seen a much more realistic approach to forecasting than ten years ago, but inflation and GDP estimates still err on the side of figures that governments will be happy with. However, the intense and rising pressure from governments that these bodies are receiving is actually a sign that forecasting is becoming more independent.

The final lesson for us as investors is simple: Take with a pinch of salt those estimates that place too much positive impact of government and central bank stimuli. Remember that things that have never happened and multipliers that have never occurred are not going to happen, even less so with all-time high levels of debt and widespread overcapacity.

Reading only mainstream macroeconomic reports, even if coming from different entities, can lead to a massive confirmation bias, and I learned many years ago that we may get dozens of different sources that ultimately just say one same thing: Government spending is always good and central banks always get it right.

We must also remember that mainstream bodies are almost entirely populated by Keynesian economists, and there is a tendency to adopt the messages of pressure groups in the economic debate, as we are witnessing with things like the Great Reset, the whitewashing of MMT (modern monetary theory) and the adoption of concepts like inequality, stakeholder investment and social spending in ways that are uncomfortably close to the political agendas of some interventionist parties. Mainstream bodies should have understood by now that adopting political mantras does not combat wrong economically radical agendas, it only undermines the entity’s credibility.  

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Edward Smith 2 months ago Member's comment

Dear Mr. Lacalle, Your article is very interesting coming from my view as a financial advisor and student of domestic and foreign economics, stock/bond markets and geopolitical impacts. I read from a huge list of sources each month, but not to be able to espouse impressive statistics, if I could even remember them all. It's because, in my humble opinion, one must be a student of the aforementioned in order to understand risk and the requisite portfolio adjustments to consider for clients based on a 'homework rationale' approach. Your sentence on using different sources of research is spot on. I read your posts on Twitter regularly and enjoy them. When your article talks about inflation, in my opinion, and even though I have no level of training as you, both CPI and PCE need to be retooled. The Federal Reserve had a 'target' of 2% for a long time, and if I understand it correctly, they just changed that to seeking an 'average' of 2%. Yet, from what I've read, PCE has barely ever hit that number. To use an analogy, I'm a 15 handicap golfer. But, if I have a target to hit 12 or want to have an average of 12 is irrelevant if I haven't seen 14 yet, and that's what the Fed-speak tells me, they're disconnected in their communications. I've had clients invested in TIPS (among many other things), both US and foreign TIPS, for most of 2020 and have done well for them doing so. And that's because, to your point, I do my own homework. While the US Fed and politicians and too much of the media state that inflation is benign, and only recently admitting that it is starting to show up, it's already been here. Case in point, the US Bureau of Labor Statistics (BLS) report for CPI for 12 months ending October of this year. There are SO many consumer categories in that report that show their 12 month rates anywhere from +3% to +10%. Yet, energy is a high negative number which probably negates all of the others, so I assume the CPI weighting math is wrong. Yet, consumers don't spend the vast majority of their money at the gas pump, they spend it on food, clothing, on-line purchases, etc. so, in my opinion, the CPI data, and most likely PCE data that the Fed and politicians rely on, are both out of touch, or need to be rebalanced, or both. Accordingly, that data is what the politicians and the Fed rely on because it's probably politically inappropriate to do otherwise, and market impacts would be high to address it as the BLS reports it. So I continue to make returns for clients in inflation based investments as appropriate while I chuckle at Fed and political speak saying that it might show up someday. BLS data shows otherwise. And to me, they're talk on 5yr/5yr data and other mathematical views means they need to step out of their cubicles and do surveys on actual consumer costs in stores, on line, etc., since consumers make up something like 60% of US GDP? SO, if their understanding of inflation is off, might not their evaluation of GDP be the same? Anyway, this is my view, sir, and I very much enjoy your writings and learning from you. Please let me know if my understanding above is incorrect or how I should adjust it, if you have time. Very sincerely, Ed

Angry Old Lady 2 months ago Member's comment

Wow, that's quite a lot to pack into a single paragraph!

Edward Smith 2 months ago Member's comment

Sorry, it actually wasn't, I typed it as paragraphs and this program changed it into just one. Odd.

Angry Old Lady 2 months ago Member's comment

Lol, I know what you mean. That has happened to me sometimes if I edit a comment. Must be a bug.