Beware of Forecasting Season

The following is an excerpt from our Q4-2015 newsletter...

The only function of economic forecasting is to make astrology look respectable.

— Economist John Kenneth Galbraith

January means it’s time for the media to pronounce its always-bold, never-remembered New Year’s predictions. You will see, hear, and read grand prognostications. They have a general bias to provoking fear. Take them lightly.

There are many brilliant economists who provide incalculable value. Their predictions are nuanced, backed by ample evidence, and not tailored for headlines or soundbites. The media prefers loud, bold, and absolute. Realize, there is an inverse relationship between certitude and credibility. 

Here are a few examples:  

The Presidential Election Will Drive Market Returns

Oil Prices Could Drop to $10 a Barrel

China Faces 2016 Crisis as Bad as U.S. Mortgage Meltdown

As you come across 2016 predictions, notice how many are anchored to the big stories of 2015. Remember, though, that most major 2015 stories were total surprises. The same will likely be true of 2016. 

We believe Galbraith’s quote is spot-on for the short-term, calendar-oriented forecasts favored by the media. To counter, here is a long-term, not headline-worthy prediction by University of Oregon economist Tim Duy:

As long as people have babies, capital depreciates, technology evolves, and tastes and preferences change, there is a powerful underlying impetus for growth that is almost certain to reveal itself in any reasonably well-managed economy.

— Economist Tim Duy