How Large Are Economic Forecast Errors?
Opinion about the reliability of economic forecasts ranges widely. Some argue that they are literally worthless, at the same time that most forecasters can point to a sequence of near perfect predictions. How much confidence should one place in economic forecasts? The errors vary with many factors.
A crucial determinant of the size of forecast errors is the forecast period; some periods are very difficult to predict while others are relatively easy. By far the largest errors were the sustained underestimations of the acceleration of inflation in 1973-75 and again in 1978-80. In addition, variations in the difficulty of predicting different variables can be illustrated by examining the forecasts. The results show drastic differences among variables in the forecasters' ability to outperform a naive standard of comparison. Finally, much of the interest in forecast accuracy stems from the wish to know "Who is the best forecaster?" Even a cursory examination of the information in this article shows that no single forecaster dominates all outliers for all, or even most, of the variables.