Confessions of an economic forecaster
Every year economists around the nation — actually, around the world — take a stab at attempting to figure out where the U.S. economy is likely to move, given that our country accounts for about one-quarter of worldwide output. Being the biggest economy in the world (yes, still far larger than runner-up China), the U.S. is often the largest trading partner of many nations, whereas our imports/exports are generally more diversified among nations.
Needless to say, the economics profession has not distinguished itself of late in this primary (potential) usefulness; that is, anticipating the outlook for U.S. economic growth and related variables. Forecasts have been particularly difficult over the past several years given that past economic relationships do not seem to be holding up very well. Stated differently, economists’ usual statistical analysis toolbox — examining past relationships and projecting into the future — seems seriously flawed. As such, it can be exceedingly difficult to accomplish this one task that may make economists useful. After all, simply passing along economic theory to college students so that we can breed yet more economists with dubious talents seems a bit pointless.
For my part, I have actually done a halfway decent job of anticipating what the U.S. economy would look in 2012. Last December I put together a forecast that called for GDP to grow at annualized percentages of 2.0, 1.5, 2.0, and 2.0 from the first through the fourth quarters, respectively. To date, data have been released for the first two quarters, with annualized growth rates of 2.0 percent and 1.3 percent. Dead on during the first quarter and off by a whisker in the second.
As well, I projected labor markets would see 1.75–2.0 million new jobs created and the unemployment rate would initially increase slightly before edging down late in 2012. While it is hard to judge 2012 results with data still to come out for the final four months, it seems as though employment growth may come in somewhere between 1.5–1.75 million (net) new jobs; suggesting (at best) my forecast was about right or (at worst) just a bit on the optimistic side. To be sure, I blew it on the unemployment rate forecast, given a sizeable drop late last year before meandering in the 8.1 to 8.3 percent range for virtually all of this year. How can I be approximately correct on job creation and off so much on unemployment? I did not expect the “discouraged worker” effect to be so powerful at this relatively late stage in the U.S. economic recovery/expansion.
In contrast to doing a pretty good job of forecasting the direction/strength of the U.S. economy, I was off by a country mile when examining Ohio and Columbus labor markets. For both areas, based upon my evaluation of past relationships of these localized economies relative to the U.S., I anticipated Ohio could expect payroll jobs growth of about one-half of one percent, with a similar outlook for the greater Columbus area. In fact, as evidenced by actual data through the first eight months of the year, employment growth will be far stronger for both Ohio and Columbus than I thought. As well, in both areas, the unemployment rate is falling far more quickly than projected.
So, am I about to expire and I desperately need to confess my economic forecasting sins? The answers are no (as best I know), I don’t think my earthly expiration date is imminent and I might normally hope people simply forget — or perhaps never paid attention to — what it was I originally projected locally.
I bring up these modest economic indiscretions to address an on-going issue: why are Ohio and Columbus doing so well? Is it — as suggested by the president — due to his national policies and their impact here in Ohio? My best guess is, no. Unless I am a total incompetent (which is certainly possible), with a national forecast that was generally on the mark, if it were simply an outgrowth of federal policies, the Ohio/Columbus results would be somewhat more in line with my original outlook.
With actual results far stronger than anticipated, I believe much of the credit can go to statewide economic developments, which suggests a generally successful effort on the part of the Kasich administration. I am not prone to lavish praise on any politician — since they generally don’t deserve credit, even as they claim it — but this seems to be an exception. I just hate it when that happens!
Dr. James Newton serves as chief economic advisor to Commerce National Bank and is an auxiliary faculty member in economics and statistics at OSU-Marion and OSU-Newark. Dr. Newton’s views do not necessarily reflect those of Commerce National Bank or OSU-Marion/Newark.