Evaluating forecasts in the 2010 – 2020 economy
Round numbered years are boom times for forecasters. There is something intellectually symmetrical about round numbers that makes people hungry for the future. Back in 2000, it was really easy to get people excited about forecasts for 2005, 2010, 2020, 2050 – all divisible by ten, mathematically elegant! There is something more confusing about analyzing trends from 2007 – 2016 than there is from looking at 2000 – 2020. The brain is a funny thing.
As we begin a new decade, you will see quite a bit of retrospective about the last ten years, and copious forecasts around the year 2020. Now is a good time for executives to brush up on their skills in evaluating forecasts, so they can critically assess what is really coming down the road. Given the high level of complexity facing our economies, this is really quite important.
Assessing forecasts is more important than the act of collecting the data itself. When you see numbers about the future in particular, we are instantly attracted to their comforting certainty. Rarely do we ask, “which assumption are packed into this trend line?” For example, take a look at this projection of potential unemployment in the United States from Q4 2009 through Q4 2020. I got this forecast from the indispensable Mike Shedlock, and he got these projections from a mix of Bureau of Labor Statistics reports and assumptions.
There is also a spreadsheet on offer “detailing” the assumptions, getting into the specifics of how many jobs might be created and when they might enter the economy.
Here’s how my analyst’s brain immediately sees this in terms of the future: I want to know what will really be HAPPENING in order to create this abstract curve. Curves like this are pure PowerPoint candy, giving us beautiful visual aids to support our discussions of the future, but the lack of explicit discussion of the future leaves us an intellectual vacuum. To really evaluate the validity of such a scenario about unemployment in the United States, we can’t leave this trend line alone – we must complicate it with all the factors that will actually go into economics in the next ten years
- Aren’t the Baby Boomers retiring during this time, or at least leaving active work?
- The Boomer “retirement” will leave a talent crisis in its wake. Will unemployment mean the same thing?
- Is there a tipping point of high employment at which American society will change and become less stable? 12%? 15%? 20%?
- What about peak oil? What if economic activity is squeezed from high energy costs?
- Which industries are assumed to create the jobs? Why will they provide more value in the next ten years?
- Does this curve assume any backlash from the Ponzi scheme meltdown of the banks? What if we crash again in 2010 or 2011?
- Will US unemployment rates roughly follow the world economy, or is this trend indicative of a shift in economic power to Asia Pacific, Europe, or Latin America?
These questions are not meant to knock down the validity of such forecasts – I’d rather have an unexamined forecast that gets us talking rather than fixate on more blather from the day’s stock market trades. More forecasts lead to more discussions and better decisions.
Hopefully 2010 will be a banner year for forecasting and strategy. If you want to more, we can recommend the book Future Inc, which dives deeper into this methodology. If you want to know even more, get in touch with us to schedule training to make your analysis more valuable to your organization.
Economics dorkfight: Mankiw versus Krugman BLOODMATCH
OK, that title is just fun to write.
The econo-blogo-sphere has been lit up between two macroeconomic heavyweights arguing about the forecasts for GDP growth. To catch you up:
- The president’s Council of Economic Advisors projects substantial GDP growth to follow the contraction, based on the logical that the deeper the recession, the more significant the recovery – as much as 15% GDP growth by 2013.
- Gregory Mankiw expresses doubt with this view – mostly because we don’t understand when the economy will bottom out. Also, something about unit root hypothesis is discussed, but I am not smart enough to figure out what it means.
- Paul Krugman suggests that the unit root hypothesis may be the root of some kind of evil, and retorts with Okun’s Law, a devastating witty retort involving the relationship between GDP and unemployment and Mankiw’s mother.
- Mankiw wants to bet Krugman some of his Nobel prize earnings as well as a night with Krugman’s mom that real GDP of 2013 will not be 15.6% higher than 2008 real GDP
I’m siding with Mankiw on this one. Not that I have a single intelligent thing to add regarding the relative predictive capability of Okun’s Law – I’m afraid I am working just with vague numbers and common sense.
As I have pointed out numberous times in this space over the last several weeks, our economic growth has been juiced entirely by debt in the last few years – a situation without precedent in the modern history of macroeconomic theory. Perhaps if this recession/depression was simply part of the natural business cycle, I would trust in the idea that the temporary unemployment would ultimately lead to pent-up demand, lots of cheap assets and talent, and ultimately a mid-term boost in economic productivity.
Here, we won’t allow assets to collapse in price or let the institutions fail, because to do so would supposedly result in chaos too great for the social 
fabric to withstand. We’re in debt as people, companies, and governments. As such, the GDP we are bleeding off is a correction back to true productivity gains. But first, the pain.
I would be very nervous to suggest to our clients that GDP would be bounding up 15.8% in the next few years just because it’s wretched now.
Mankiw WINS.
Unemployment means “available talent”
Which is a good thing, since U.S. unemployment is at its highest since 1945.
Remember, we’re headed into an unprecedented global talent crisis as well. It sounds like a paradox, and it is. But it still means that lots of well-educated and skilled people will be available to start new lives, think new thoughts, and explore new directions.
Chaos mean opportunities.
About Eric Garland
Eric is one of the world's pre-eminent thoughtleaders in forecasting and strategy. He helps leaders of business and government make critical decisions about their futures.Connect with us
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