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Harris Maury. Inside the Crystal Ball
Acknowledgments
Introduction. What You Need to Know about Forecasting
Chapter 1. What Makes a Successful Forecaster?
Grading Forecasters: How Many Pass?
Why It's So Difficult to Be Prescient
Bad Forecasters: One-Hit Wonders, Perennial Outliers, and Copycats
Success Factors: Why Some Forecasters Excel
Does Experience Make Much of a Difference in Forecasting?
Chapter 2. The Art and Science of Making and Using Forecasts
Judgment Counts More Than Math
Habits of Successful Forecasters: How to Cultivate Them
Judging and Scoring Forecasts by Statistics
Chapter 3. What Can We Learn from History?
It's Never Normal
Some Key Characteristics of Business Cycles
National versus State Business Cycles: Does a Rising Tide Lift All Boats?
U.S. Monetary Policy and the Great Depression
The Great Inflation Is Hard to Forget
The Great Moderation: Why It's Still Relevant
Why Was There Reduced Growth Volatility during the Great Moderation?
Chapter 4. When Forecasters Get It Wrong
The Granddaddy of Forecasting Debacles: The Great Depression
The Great Recession: Grandchild of the Granddaddy
The Great Recession: Lessons Learned
The Productivity Miracle and the “New Economy”
Productivity: Lessons Learned
Y2K: The Disaster That Wasn't
The Tech Crash Was Not Okay
Forecasters at Cyclical Turning Points: How to Evaluate Them
Forecasting Recessions
Forecasting Recessions: Lessons Learned
Chapter 5. Can We Believe What Washington, D.C. Tells Us?
Does the U.S. Government “Cook the Books” on Economic Data Reports?
To What Extent Are Government Forecasts Politically Motivated?
Can You Trust the Government's Analyses of Its Policies' Benefits?
The Beltway's Multiplier Mania
Multiplier Effects: How Real Are They?
Why Government Statistics Keep “Changing Their Mind”
Living with Revisions
Chapter 6. Four Gurus of Economics. Whom to Follow?
Four Competing Schools of Economic Thought
Minskyites: Should We Keep Listening to Them?
Monetarists: Do They Deserve More Respect?
Supply-Siders: Still a Role to Play?
Keynesians: Are They Just Too Old-Fashioned?
Chapter 7. The “New Normal”: Time to Curb Your Enthusiasm?
Must Forecasters Restrain Multiyear U.S. Growth Assumptions?
Supply-Side Forecasting: Labor, Capital, and Productivity
Are Demographics Destiny?
Pivotal Productivity Projections
Chapter 8. Animal Spirits. The Intangibles behind Business Spending
Animal Spirits on Main Street and Wall Street
Can We Base Forecasts on Confidence Indexes?
Business Confidence and Inventory Building
How Do Animal Spirits Relate to Job Creation?
Confidence and Capital Spending: Do They Move in Tandem?
Animal Spirits and Capital Spending
Chapter 9. Forecasting Fickle Consumers
Making and Spending Money
How Do Americans Make Their Money?
Will We Ever Start to Save More Money?
Why Don't Americans Save More?
More Wealth = Less Saving
Do More Confident Consumers Save Less and Spend More?
Does Income Distribution Make a Difference for Saving and Consumer Spending?
Pent-Up Demand and Household Formation
Chapter 10. What Will It Cost to Live in the Future?
Whose Prices Are You Forecasting?
Humans Cannot Live on Just Core Goods and Services
Sound Judgment Trumps Complexity in Forecasting Inflation
Should We Forecast Inflation by Money Supply or Phillips Curve?
Hitting Professor Phillips' Curve
A Statistical Lesson from Reviewing Phillips Curve Research
Chapter 11. Interest Rates: Forecasters' Toughest Challenge
Figuring the Fed
Federal Open Market Committee
What Is the Fed's “Reaction Function”?
Is the Fed “Behind the Curve”?
Can the Fed “Talk Down” Interest Rates?
Bond Yields: How Reliable Are “Rules of Thumb”?
Professor Bernanke's Expectations-Oriented Explanation of Long-Term Interest Rate Determinants
Supply and Demand Models of Interest Rate Determination
When Will OPEC, Japan, and China Stop Buying Our Bonds?
What Will Be the Legacy of QE for Interest Rates?
What Is the Effect of Fed MBS Purchases on Mortgage Rates?
Will Projected Future Budget Deficits Raise Interest Rates?
Chapter 12. Forecasting in Troubled Times
Natural Disasters: The Economic Cons and Pros
How to Respond to a Terrorist Attack
Why Oil Price Shocks Don't Shock So Much
Market Crashes: Why Investors Don't Jump from Buildings Anymore
Contagion Effects: When China Catches Cold, Will the United States Sneeze?
Chapter 13. How to Survive and Thrive in Forecasting
Surviving: What to Do When Wrong
Hold or Fold?
Thriving: Ten Keys to a Successful Career
About the Author
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A long and rewarding career in forecasting has importantly reflected the consistent support and intellectual stimulation provided by my colleagues at the Federal Reserve Bank of New York, the Bank for International Settlements, PaineWebber, and UBS. Senior research management at those institutions rewarded me when I was right and were understanding at times when I was not so right. My colleagues over the years have been a source of inspiration, stimulation, criticism, and encouragement.
Special thanks are addressed to my professional investment clients at PaineWebber and UBS. Thoughtful and challenging questions from them have played a key role in my forming a commercially viable research agenda. Their financial support of my various economics teams via institutional brokerage commissions has always been much appreciated and never taken for granted in the highly competitive marketplace in which economic forecasters practice their trade.
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The book begins by assessing why some forecasters are more reliable than others. I then present my approach to both the statistical and judgmental aspects of forecasting. Subsequent chapters are focused on some long-standing forecasting challenges (e.g., reliance on government information, shifting business “animal spirits,” and fickle consumers) as well as some newer ones (e.g., new normal, disinflation, and terrorism). The book concludes with guidance, drawn from my own experience, on how to have a successful career in forecasting. Throughout this volume, I aim to illustrate how successful forecasting is more about honing qualitative judgment than about proficiency in pure quantitative analysis – mathematics and statistics. In other words, forecasting is for all of us, not just the geeks.
In some instances, judging forecasters by how close they came to a target might be an unnecessarily stringent test. In the bond market, for example, just getting the future direction of rates correct is important for investors; but that can be a tall order, especially in volatile market conditions. Also, those who forecast business condition variables, such as GDP, can await numerous data revisions (to be discussed in Chapter 5) to see if the updated information is closer to their forecasts. Interest-rate outcomes, however, are not revised, thereby denying rate forecasters the opportunity to be bailed out by revised statistics. Let's grade interest rate forecasters, therefore, on a pass/fail basis, where just getting the future direction of rates correct is enough to pass.
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