ECONOMIC FORECASTERS
How Often Are They Right?
ECONOMIC forecasters trace their ancestry to a 16th century astrologer who was hired to prophesy financial trends for the German banking house of Fugger. The art of business prediction has come a long way from its starry-eyed origins. But economists admit readily that their prognostications are still largely a matter of educated guesswork. And in the current uncertainty over the economic outlook, guesstimating fever has reached epidemic pitch. Says one topflight Washington economist: "We work by the seat of our pants more often than we like to admit."
How good are the forecasters? In recent years, even the best prophets have been caught with the seat of their pants down. As late as 1945 and 1946, most business analysts insisted that World War 11, like every other major conflict since Napoleon's day, would be followed by a depression. They failed to take into account the huge backlog of buying power behind bottled-up wartime shortages. Many of them underestimated the 1953 boom; many oversold the 1954 recession. Even in January 1955, as the U.S. hummed into an alltime record year, eight economists at a congressional hearing foresaw only a slight pickup from 1954. At the start of 1956, almost all economists were correct in predicting that business would be good for 1956's first half. However, said the University of Pennsylvania's Irwin Friend, the signs were so plain that "only a very silly forecast could have been wrong."
Despite the errors, the broad, long-term predictions have been far closer to target today than they were in the pre-World War II period. Major reason is the ever-increasing range and volume of information on the econ omy. As chairman of the President's Council of Economic Advisers, Arthur Burns has greatly speeded the flow of vital statistics from marketplace to slide rule; e.g., housing trends, long forecast by the volume of construction starts, are now tracked months earlier on the basis of mortgage applications. Burns helped devise two of the profession's widely used yardsticks while director of the august National Bureau of Economic Research (1945-53). From 800 statistical series on the U.S. economy, Burns's staff picked 21 key indicators, business failures, durable-goods orders, etc. that faithfully pace business shifts. Under Burns the National Bureau also perfected the "diffusion index," a cross section of indicators used to gauge the strength of an upswing or downturn.
Many of the nation's top economists still prefer their own pet systems to such rigid formulas. Massachusetts Institute of Technology's Paul Samuelson compiles .a "loose probability spread," based on national income, investment, taxes, inventories, department-store sales, etc. Harvard's Sumner Slichter (see EDUCATION), who bats high in the business, emphasizes that good forecasting requires i) "imagination," 2) "comprehensive knowledge of the economy," 3) "thoroughness" in evaluating information. He contends that sound conclusions can only be based on a sound "substructure"; e.g., he tests his own prognostications by building the strongest possible counterargument from the same facts. Slichter, who predicted last year that 1956's third quarter would be "the year's worst" and the fourth quarter "the year's best," is sticking by his prophecy.
Most economists today agree that business trends--and their own predictions--are rooted as deeply in psychology as in economics. Many organizations regularly supplement savings and income figures by surveying consumer attitudes. Nevertheless, virtually all economists fell far short of the mark in predicting the 1955 housing and automobile markets, mainly because they underestimated the extent to which U.S. consumers would go into debt. The forecasters were apparently too immersed in their figures to notice the new cars flashing past, though they later coined a new phrase for an old urge: "Cumulative effect of new cars in any given community," i.e., keeping up with the Joneses.
Economists admit that their main faults are over-conservatism and a tendency (like military intelligence officers) to talk on both sides of a forecast so that they will turn out at least half-right in any event. But the biggest flaw in forecasting is that the experts still do not have enough up-to-date statistics to pinpoint economic shifts. In many spheres of activity the facts arrive too late to signal turning points. Moreover, sampling errors in many surveys are frequently bigger than the telltale swing they may reveal. Thus the business prophets who have been most consistently right have usually been those with an unscientific faith in the nation's capacity for growth. Says one member of the Council of Economic Advisers: "In the U.S., we have 165 million people, all striving to better themselves. That tremendous driving force should underlie all attempts to measure the trends of the American economy."
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