Sun, Jul 25, 2004 - Page 11 News List

Looking backwards to try and see the future

CRYSTAL BALL If GDP is so important for an economy, why do so many forecasters get it wrong -- and yet still keep their jobs, not to mention their media connections?

NY TIMES NEWS SERVICE , NEW YORK

The GDP -- the broad measure of output -- is the ultimate headline number for an economy. Everything from presidential election strategies to marketing plans for a new brand of shaving cream can hinge on the quarterly GDP figures.

Accordingly, economists on Wall Street, in corporate America and in academia spend much time plugging data into their meticulously designed models and producing precise forecasts. The Wall Street Journal, the Federal Reserve Bank of Philadelphia and the newsletter Blue Chip Indicators are just a few of the organizations that compile and publish their predictions. But their collective vision is so murky that it seems as if economists are looking into a tankard of pitch-black Guinness' Ale instead of a crystal ball.

At the end of last year, the 54 economists polled by The Wall Street Journal concluded that the GDP would grow at an annual rate of 4.5 percent in the first quarter this year. The number came in at 3.9 percent. The participants' calls ranged from the laughably low -- Edward Leamer of the University of California, Los Angeles, predicted 2.7 percent -- to the absurdly high. Brian Wesbury of Griffin, Kubik, Stephens & Thompson Inc and Lawrence Kudlow of Kudlow & Co -- supply-siders both -- predicted growth of 6.3 percent and 6.1 percent, respectively.

If Al Roker foretold the weather with such accuracy on the Today show, he might be relegated to a Sunday morning daybreak slot. (Kudlow is still co-host of a prime-time program on CNBC.)

And there is little consistency. John Lonski, chief economist at Moody's Inc. and the reigning champion of The Wall Street Journal's survey, has been substantially off base in some surveys.

"It's a bit disconcerting to note that for some reason you do not find individuals repeating with any frequency in the top spot among forecasts," he said.

Why can social scientists' forecasts go awry? "It's like driving ahead while looking in your mirror," said Gene Huang, chief economist at the Federal Express Corp.

The statistics that economists receive today often describe conditions from one or two months ago. What's more, many numbers -- including those for the GDP -- are routinely revised several times after they are issued.

But the data aren't the only problem. Economists, like most other humans, tend to forecast by extrapolating existing trends. That's fine when things tend to keep moving in the same direction. But when there is a shift, look out.

Two economists, James Stock of Harvard and Mark Watson of Princeton, found that professional forecasters surveyed by the Fed-eral Reserve Bank of Philadelphia had all the short-term vision of Mr. Magoo when the business cycle turned. In the fourth quarter of 2000, amid a long-running expansion, the three dozen economists in the survey projected that the economy would grow in the first quarter of 2001 at an annual rate of 3.3 percent; instead, it contracted at a 0.6 percent annual rate.

In the fourth quarter of 2001, they said the economy would grow at a 0.1 percent annual rate in the first quarter of 2002. Oops. The actual figure was 5 percent.

Acting on those forecasts would have left a business going full steam ahead when the bottom fell out, and idling while the economy was burning rubber.

Some economists say we shouldn't expect perfection.

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