Economic Forecasting - How Credible?

By: Ian Campbell | Thu, Nov 1, 2012
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A recent article that uses a recent Goldman Sachs analyst forecast on China's long-term growth rate as a bridge to discuss the methodologies employed by economists when making forecasts - and why the author thinks that most economists mis-forecast and simply miss prospective economic change (such as the 2008 financial crisis) because of those methodologies.

As I read the article, which I recommend to you, I believe the root argument put forth by the author can be simply stated as:

No one, economist or otherwise, can blithely assume that history will repeat itself when forecasting. Instead, one must review history and adjust it to reflect changed and changing forecast inputs and outputs that result from adjustments and structural alterations that have occurred between the time the historic results were generated and the time a current forecast is being made.

In simple terms I believe the author's position to be, which position I agree with, that it makes absolutely no sense to generate a 'next five year' forecast in 2012 for the U.S. economy based on the economic performance of the U.S. economy from 1980 to 2000 when the financial underpinnings and jobs mix (to note only two of many important changes) are entirely different in 2012 and prospectively than they were in those prior years.

Frequently in this Newsletter I have said I believe that many economists wrongly advance a theoretical forecast framework based on irrelevant history when reaching conclusions on what is prospectively going to happen in any particular economy at any given point in time - and hence many economists inherently are doomed to get things wrong before they put pen to paper (or now fingers on the keyboard).

I also think many financial analysts every day fall into the same 'locked into history trap'.

I strongly suggest, particularly if you are concerned about the stability and future direction of the financial markets that you read Here's A Massive Mistake That Analysts Make When Examining China. I suggest you do that not for any reason related specifically to China, but rather to think carefully about what the author has to say about economic (and indirectly financial markets) forecasting, and importantly decide whether you agree with his views or not.

Topical Reference: Here's A Massive Mistake That Analysts Make When Examining China, from Business Insider, Michael Pettis, October 27, 2012 - reading time 5 minutes, thinking time longer.



Ian Campbell

Author: Ian Campbell

Ian R. Campbell, FCA, FCBV
Business Transition Simplified

Through his website and his Business Transition & Valuation Review newsletter Ian R. Campbell shares his perspectives on business transition, business valuation and world economic and financial markets influences on those two topics. A recognized business valuation and transition authority, he founded Toronto based Campbell Valuation Partners Limited (1976). He currently is working to bring his business valuation and transition experience to both business owners and their advisors in our new economic, business and financial markets normal.

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