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Forecast
Report Card
Someone once said, “The trouble
with weather
forecasting is that it’s right too often for us to ignore it and wrong too
often for us to rely on it.”1
The
same is true of economic forecasts. It would be difficult for the financial
world to exist without them — yet they are frequently wrong. However, economic
forecasts can be useful for investors who use them as a starting point but
remain flexible when actual performance varies.
Here are some recent economic forecasts compared to actual performance.
 | One hundred leading
economists surveyed in Blue Chip Economic Indicators in January 2001
estimated that gross domestic product (GDP) would grow 2.6 percent that
year.2 Yet 2001 was marked by three
consecutive quarters of negative growth, and GDP grew by just 0.3 percent.3
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| The same survey found
that most economists didn’t expect a recession in 2001 but believed a
substantial risk of one existed.4 In fact,
a recession did begin in the first quarter of 2001.
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| The Conference Board, a
respected nonprofit research group that publishes the monthly consumer
confidence index, estimated in February 2001 that the U.S. economy was not
in a recession, nor was one imminent.5
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| The consensus estimate
of The Wall Street Journal’s annual economic-forecasting survey
for GDP growth in 2002 was 0.87 percent for the first quarter and 2.4
percent for the second.6 The actual growth
rates for the first and second quarters were 5 percent and 1.1 percent,
respectively.7
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| One study of 19 years
of economic surveys found that economists failed to predict the right
direction of long-term interest rates 71 percent of the time.8
Probably the primary reason why predictions turn out wrong is unexpected
developments that economists could not have foreseen. Common reasons include
major world events, new legislation, election outcomes - even weather
patterns.
Of course, not all forecasts are wrong, but for individual investors the
lesson seems clear. Rather than basing your financial plan on future
projections, prepare for a range of outcomes - from worst-case to best-case
scenarios and everything in between.
1) Quote by Patrick Young, Brainyquote.com, 2002
2, 4) Dow Jones Business News, January 9, 2001
3, 7) Bureau of Economic Analysis, August 2002
5) Capital Markets Report, February 14, 2001
6, 8) The Wall Street Journal, January 4, 2002 |
©
2002 Emerald Publications
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