Bad Habits Plague Economic Forecasting

Three years after the Great Recession ought to have challenged even the most basic assumptions made by economists, they have instead settled back into the costly habits of old.

The same experts who largely missed the onslaught of the worst recession since World War II have consistently overestimated the strength of the recovery in major Western economies.

An analysis of Reuters polls shows economists were too optimistic about 20 out of 27 major monthly indicators for April and May in the United States, the euro zone and Britain — a list that includes industrial output, jobs, business and consumer sentiment data, and purchasing managers' indexes.

While oil price surges earlier this year and March's devastating earthquake in Japan have undoubtedly made forecasting trickier in recent months, the schism between what was "expected" and the gloomier reality that follows reappears with regularity.

All too often these indicators — the May U.S. non-farm payrolls and The Federal Reserve Bank of Philadelphia's June business conditions index, to name just a couple — came in well below even the lowest forecasts provided by dozens of economists from banks and research institutions.

"They've underestimated the scale of the shock and people think it's all over, and they want to be back to business as usual," said David Blanchflower, professor of economics at Dartmouth College in New Hampshire, and a former member of the Bank of England's Monetary Policy Committee.

"The problem is that it isn't, and we are not 'back to business' any time soon."

Read the rest here.