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BofA "Explains" Why Optimistic Economist Forecasts Have Been So Wrong In The Past 5 Years

Tyler Durden's picture




 

A few days ago, when looking at the latest quarterly compendium of humor, aka the IMF's world economic outlook release, we showed the reason why economists are such horrible forecasters: all they do is extrapolate trends.

 

Of course, this is not even remotely close to economic analysis as it assumes a perfect world devoid of any realitym and would hardly even pass as an Art 101 project.

This, however, appears to have ruffled some feathers among Wall Street's economic community, especially among those who extrapolate trends for a living. Such as BofA's Michelle Meyer, who overnight released an amusing note titled "The Random Act of Forecasting" in which she tries to explain how 7 years after the advent of central planning, first in the US and soon everywhere else, everyone has been so massively wrong when it comes to forecasting the "imminent" recovery.

Amusing, because it contains the following attempt to scapegoat a "series of mini shocks":

we can look back to the start of the recovery and identify the shock or vulnerability each year which impaired the recovery.

BofA may call them mini shocks. Others may call them reality. And this is how Bank of America justifies the fact that year, after year, after year, reality has failed to match up with Bank of America's (or the Fed's) model. From BofA:

  • 2010: The first full year of the recovery was a growth recession with a collapse in inventories (after the restocking was complete), and continued private sector deleveraging.
  • 2011: There were a series of events, including the Japanese tsunami, spike in oil prices and US debt downgrade by S&P.
  • 2012: The crisis in the Eurozone intensified with concerns over a Greek exit and a breakup of the Eurozone. The policy response abroad was lackluster and there were concerns of another financial crisis.
  • 2013: The combination of the sequester, debt ceiling fight and government shutdown created an environment of heightened uncertainty and fiscal restraint.
  • 2014: The polar vortex delayed economic activity and led to a permanent loss of growth.
  • 2015: Rapid appreciation of the dollar and heightened uncertainty about the winners and losers from plunging oil prices has hurt growth. A small part of the weakness may be related to the weather and the dock strike.

Again, as we said: "reality."

Of course, when one models "reality" while excluding the impact of reality, things end up being forecast incorrectly.

So just in case this wasn't enough of an excuse for why economists have now become the most useless and overpaid profession on The Weather Channel, here are some more excuses from economists why, for the past 5 years, they has been dead wrong.

The choppy data create difficulties in the forecasting process. When the data weaken, even if there is a tendency to explain it away due to special factors, expectations are naturally set lower. This is shown in the data surprise index — inflections in the index represent the periods when the data are shifting relative to expectations. A low reading in the data surprise index is not just indicative of weaker data flow, but also of expectations that were set too high.

 

The mood swings in this cycle have been exceptional. We have oscillated between calls for a V-shaped recovery to a double-dip recession to cries of secular stagnation. It is as though forecasters are behaving as hormonal teenagers. The reality is that this has been the recovery of fits-and-starts and the hysteria in forecasting is due to the following factors:

 

Return to normalcy: there is a tendency to forecast a return to the “steady state”, which is a function of prior business cycles. However, in this recovery, looking at past cycles has been misleading. Recoveries from major banking and real estate crises are both weaker than the normal cyclical rebound and more sensitive to shocks. As we reminded readers last week, our core story for the last six years has been that the US was in a slow, fragile recovery, and growth would only begin to pick up once balance sheets fully healed.

 

There has been a slow capitulation that the concept of normality has changed after this recession. Forecasts for potential growth have been slashed along with expectations for the equilibrium Fed funds rate. The consensus, based on the Blue Chip survey, has taken down its forecast for potential GDP growth from 2.8% pre-recession to 2.6% in 2010 and 2.3% today.1 The FOMC has similarly revision down its long-run GDP forecast (Chart 2). Forecasts for the equilibrium Fed funds rate have followed suit (Chart 3). Part of this revision would have happened regardless of the business cycle, given the aging of the population. However, it was probably a faster realization and perhaps more dramatic given the other overhangs on the economy. As the long-run estimates are adjusted, forecasters rethink estimates for growth based on a new trajectory of potential.

 

Trend extrapolation: It is exceptionally difficult to identify turning points in the economy. Although there were warnings of excesses in the economy and the usual signals were clear, including an inverted yield curve, forecasters continued to pencil in a recovery. In the October 2007 SEP, the FOMC was expecting growth of 1.8 - 2.5% in 2008 and 2.3 - 2.7% in 2009. Even in January 2008, as the economy was slipping into recession, the FOMC was still expecting growth of 1.3 - 2.0% for the year. Indeed, they didn’t pencil in a decline until the October 2008 SEP — they marked down 2009 growth to -0.2 to 1.1% from 2.0 to 2.8% in June. 2 The challenge is that it is difficult to fight the current trend. Many models include a trend variable, which could be as simple as a moving average of the dependent variable.

 

Point estimates: Economists, the private sector and the FOMC all give point estimates. It is understandable as we have to be held accountable for a forecast and need to differentiate ourselves from others. However, point estimates give a false sense of precision. In reality, we should be forecasting with confidence bands around our forecasts, so that we can illustrate the distribution of risks. For example, our forecast this year is for 2.9% growth, but we wouldn’t be surprised to see growth anywhere from the low 2’s to the mid 3’s.

Moreover, with point estimates, it is difficult to capture the vulnerability of the economy and possibility of shocks, in either direction. This is a critical challenge for the Fed’s SEP and we would therefore not be surprised if they decide to implement confidence bands, particularly around the Fed funds forecasts.

And our all time favorite:

Confirmation bias: which comes first the forecast or the data analysis? With so much data to sort through, forecasters must guard against focusing just on data that supports their case. Consider the recent debate about incipient wage inflation. A couple years ago, the short-term unemployment rate was supposedly a signal of imminent inflation. This was confirmed by a particular measure of wages —average hourly earnings for production and non-supervisory workers (AHEPN). With inflation dipping recently and particular weakness in the AHEPN series, those indicators seem to have been forgotten. When the facts change, find new facts!

It's our favorite, because as Upton Sinclair once put it, this is the "It is difficult to get a man to understand something, when his salary depends on his not understanding it" excuse. Everything else follows from there.

 

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Fri, 04/17/2015 - 10:40 | 6002895 LawsofPhysics
LawsofPhysics's picture

LOL!  The answer is simple.

The truth is treason in an empire of lies.

Fri, 04/17/2015 - 10:44 | 6002916 PartysOver
PartysOver's picture

Those that can, do.  Those that can not become economist and expert excuse creators.

Fri, 04/17/2015 - 10:52 | 6002938 LawsofPhysics
LawsofPhysics's picture

Yep, once again humanity is due for a major reset in compensation motherfuckers...

same as it ever was...

Fri, 04/17/2015 - 10:54 | 6002942 nope-1004
nope-1004's picture

It really is too bad that we have weather.  I mean, c'mon God!  We need a bustling economy here!  We need GDP to expand.  Stop creating weather already and get with the program!

 

I hate air, sun, wind, rain, and snow anyway.  Just some of my pet peeves.

 

Fri, 04/17/2015 - 10:57 | 6002961 Dr. Richard Head
Dr. Richard Head's picture

It's foggy today where I am at, so maybe that is an indication of a growth recession.  WTF is a growth recession?  Bunch of tards acting like economists. 

Fri, 04/17/2015 - 11:09 | 6003003 Manthong
Manthong's picture

Geez, not one freaking mention of global warming, Nibiru or Satan.

These guys must be using goat entrails for their analysis.

Fri, 04/17/2015 - 13:46 | 6003562 PTR
PTR's picture

If you don't like your pets, I'm for hire.  I put .22's in kittens' heads to make ends meet.  Fee negotiable.

 

(I just wanted to say something terrible today.)

Fri, 04/17/2015 - 10:59 | 6002966 KnuckleDragger-X
KnuckleDragger-X's picture

Do hunter-gatherers get minimum wage or are they unionized?

Fri, 04/17/2015 - 10:46 | 6002922 NoDebt
NoDebt's picture

OK, everybody sit REALLY STILL for the rest of the year.  No shocks of any kind in 2015 and we're golden.  Prosperity will return.

Fri, 04/17/2015 - 12:49 | 6003364 SDShack
SDShack's picture

Recovery Summer V6.0, or is it V7.0?

Fri, 04/17/2015 - 10:51 | 6002937 junction
junction's picture

2016: OMG! Obama removed his mask, he really is an alien. And flying saucers are pounding Wall Street into rubble.  The banksters even ripped off the aliens and boy, are they angry. 

Fri, 04/17/2015 - 10:55 | 6002950 Freddie
Freddie's picture

Obola, Democrats, NeoCon/Neo Lib scum and their NWO elite and zio billioanire bosses.

Fri, 04/17/2015 - 11:41 | 6003073 Ham-bone
Ham-bone's picture

For F###S sake...Wall St., Marriner Eccles, and DC create the FRAUD and RIGGING moving the Pinochio-like market like Gepetto pulling the strings...and then discuss the movements of Pinochio like he's a real boy although anybody who cares to look can see the clumsy movements and strings.

Or we could talk about the mechanics of rigging...like here...

http://econimica.blogspot.com/2015/04/the-federal-reserve-is-parasite-only.html

or here...

http://econimica.blogspot.com/2015/03/brics-blink-or-more-correctly-wink-and.html

 

or what's really happening here...

http://econimica.blogspot.com/2015/03/are-seeds-of-depression-sprouting.html

N. Korea is getting a real run for it's position as greatest propagandist state and the American people want anything but the truth...F##K YEAH 'MERICA!

Fri, 04/17/2015 - 12:13 | 6003150 nope-1004
nope-1004's picture

 

Were the Fed to simply signal it was committed to raising rates, the impact would be felt immediately.  "Investors" holding winners would sell.  This would send rates higher (a flood of sellers would be met by a trickle of buyers effectively pushing the rates buyers demand straight up).  Selling would beget more selling...rising rates causing further rising rates.  In short, the bond market supernova so many have feared would come to fruition.  The US interest payments on it's Treasury debt would skyrocket.  Buyers would have to be incented with rates so attractive they were willing to sell off their existing portfolios and rotate to US Treasury's.  A return to just the 50/yr average for US Treasury debt of 7% would cost the US government about $1.3 trillion annually...or nearly 50% of all federal tax revenues.  The "bond-mageddon" would be upon us.

 

100% accurate.  Have missed you and your cogent comments here.  Stick around!

 

Fri, 04/17/2015 - 12:28 | 6003270 Ham-bone
Ham-bone's picture

Hey Nope....thanks and always lurking but trying to focus the little time I have on research and writing.  I try not to let myself get dragged into the comment section debates.

Funny, I don't talk about this stuff with anybody anymore...I just write and post my stuff for the sake of mental health.  Even funnier, in a bit of a crown and coke fog a couple nights ago a wrote a comment on Bernanke's blog regarding the size of the Fed's balance sheet.  Somehow it slipped through  the filter and curious if Ben would ever take the time and effort to reply...not holding my breath.

Fri, 04/17/2015 - 10:42 | 6002899 ParkAveFlasher
ParkAveFlasher's picture

3 of 6 reasons are weather-related.  Brilliant analysis, right there.

Fri, 04/17/2015 - 10:43 | 6002913 infotechsailor
infotechsailor's picture

6 of 6 reasons were complete bullshit.

 

0 of 6 reasons blamed the out of control central banks

Fri, 04/17/2015 - 11:03 | 6002977 duo
duo's picture

The Obamacare shitstorm

Fri, 04/17/2015 - 11:58 | 6003165 TBT or not TBT
TBT or not TBT's picture

="regime uncertainty" which is economist shorthand for what caused FDR's depression to be Great, rather than short.  

 FDR and his cronies inflicted "bold and persistent experimentation" and humans looking out for their interests reduced their exposure.  They "shrugged" if you will.   Amity Schlaes' The Forgotten Man skewers that evil stupidity very well, and hopefully the TPTB and the electorate have had quite enough now. 

Fri, 04/17/2015 - 10:42 | 6002904 appocean
appocean's picture

2008 - election of B.O.

Fri, 04/17/2015 - 12:01 | 6003176 TBT or not TBT
TBT or not TBT's picture

2006, the beginning of the Pelosi and Reid majorities in Congress.  

Fri, 04/17/2015 - 10:43 | 6002905 bnbdnb
bnbdnb's picture

Just let Watson handle it.

Fri, 04/17/2015 - 10:43 | 6002910 tnquake
tnquake's picture

It wasn't my fault, I swear to God!

https://www.youtube.com/watch?v=JFvujknrBuE

 

Fri, 04/17/2015 - 10:44 | 6002911 BoPeople
BoPeople's picture

Blah, blah, blah blah, blah blah blah ...

I wonder what they will make of this: http://www.independent.co.uk/news/world/europe/earthworms-rain-down-from...

They should spent a little less time trying to fit things into their existing paradigm and instead read "The Complete Works of Charles Fort"... and then look at things anew.

Fri, 04/17/2015 - 10:48 | 6002926 philosophers bone
philosophers bone's picture

It doesn't matter if the "forecast" is accurate or inaccurate.  All that matters is that a "forecast" is made which purports to "analyze" some piece of data - "fundamentals", "technicals" or or other "data" relating to the "stock market", or the "free market economy" - so as to confuse and confound until you just lose interest.

Then some asshole talking heads spew a bunch of bullshit loosely backed up with "supporting" numbers, theories, charts, tables and new forecasts. The key is to make it overly complicated and distracting so the average person feels the need to defer to the "experts" rather than grabbing a pitchfork.

Fri, 04/17/2015 - 10:48 | 6002927 buzzsaw99
buzzsaw99's picture

It's an ice floe. Floating throughout this region are many icebergs, and nobody owns them. They're PDls - public domain icebergs... [/Dr. Jason, Brewster's Millions]

Fri, 04/17/2015 - 10:50 | 6002935 NoDebt
NoDebt's picture

This economy would run so smoothly if it wasn't for all those damned people doing whatever they please.  We should petition the government to take away those freedoms and force people to do what we know they should be doing.

Fri, 04/17/2015 - 10:53 | 6002943 buzzsaw99
buzzsaw99's picture

we already have that program, it's called quantitative easing. perhaps you've heard of it?

Fri, 04/17/2015 - 10:52 | 6002941 Bell's 2 hearted
Bell's 2 hearted's picture

B of A, get a clue

 

debt overhang growing and median household income fell 5% between 2010 and 2013

 

 

http://www.federalreserve.gov/pubs/bulletin/2014/pdf/scf14.pdf

 

Fri, 04/17/2015 - 10:53 | 6002946 luckylongshot
luckylongshot's picture

When are we going to give up on economists. They portray themselves as professionals and yet are almost always wrong. Part of the reason for this  is that like weather forecasters, if one started getting it right the others would be made redundant. Another potential explanation is that the father of economics Adam Smith, invented the myth of ancient barter base societies out of thin air, plagiarised parts of his theories from the Persians and assumed a profit motive behind all of human nature that grossly oversimplified reality to the point of making most of his theories unrealistic. The result is GIGO.

Fri, 04/17/2015 - 10:59 | 6002964 Bumbu Sauce
Bumbu Sauce's picture

The average person is semi-idiotic IQ-wise.  They haven't the ability or desire to understand how things work, besides NFL, Nicki Minaj's booty, latest Samsung/iPhone, etc...

They rely on "experts."  It is foolish and we all suffer for it.

Fri, 04/17/2015 - 10:55 | 6002951 sheikurbootie
sheikurbootie's picture

The real reason the economist are always wrong is because they SUCK. 

A fucking blind mouse can see the economy is NOT recovering.  There's nothing on the horizon to make it recover, therefore it will not recover for the foreseeable future.

Fri, 04/17/2015 - 10:57 | 6002958 CPL
CPL's picture

The first mistake was 'normalcy' was going to be allowed to continue either by fictional math or by pretending that a single country with 5% of the global population would be allowed to continue to consume 70% of all the resources and contribute nothing back.  It only leads to the obvious conclusion:  the USA is the sacrificial bull along with any of it's partners in five eyes. 

Incidentally, 'Big Red', aka Ezzat Al Douri.  The Butcher of Bagdad and one of the chief commanders of ISIS is dead.  If any of you understand this, you know what comes next.  Better run or the lighting will catch you in the storm.

Fri, 04/17/2015 - 10:57 | 6002959 taketheredpill
taketheredpill's picture
  • 2010: The first full year of the recovery was a growth recessionwith a collapse in inventories (after the restocking was complete), and continued private sector deleveraging.
  • 2011: There were a series of events, including the Japanese tsunami, spike in oil prices and US debt downgrade by S&P.
  • 2012: The crisis in the Eurozone intensified with concerns over a Greek exit and a breakup of the Eurozone. The policy response abroad was lackluster and there were concerns of another financial crisis.
  • 2013: The combination of the sequester, debt ceiling fight and government shutdowncreated an environment of heightened uncertainty and fiscal restraint.
  • 2014: The polar vortex delayed economic activity and led to a permanent loss of growth.
  • 2015: Rapid appreciation of the dollar and heightened uncertainty about the winners and losers from plunging oil prices has hurt growth. A small part of the weakness may be related to the weather and the dock strike.

 

OK.  Thank You.  Now I'm going to ask you to review the 2010 to 2015 period one more time.  But this time I'm going to stand behind you with a baseball bat.  If you say anything stupid or farcical I'm going to hit you on the top of your head.  

And, begin...

Fri, 04/17/2015 - 11:03 | 6002980 taketheredpill
taketheredpill's picture

 

 

Really it's all about career risk for the economists.  Figure out the trend and then make sure your forecast is a little over/under the trend.  Not too much!  Just enough that you can say you got it right or alternatively you were wrong but you got the direction right.

 

It's when the trend changes that the real fun begins.  Then they scramble to over-compensate so if they missed a recession they usually miss the recovery too.  Then the search for the new trend begins and hopefully you still have a job.  You probably do, unless you did something really stupid like made a real call and got it wrong.  Or forecast a recession. Right or wrong that one isn't popular at all.

Fri, 04/17/2015 - 11:04 | 6002985 I am a Man I am...
I am a Man I am Forty's picture

because "I don't have the foggiest fucking idea" doesn't get you paid

Fri, 04/17/2015 - 11:19 | 6003039 Ban KKiller
Ban KKiller's picture

But...being an attorney drowning in student debt while pursuing evil outcomes pays pretty well at BofA. Also they will admit, from time to time when they lose a court case, that "I don't have the foggiest fucking idea" when it comes to honesty. That should be BofA motto! 

Fri, 04/17/2015 - 11:05 | 6002989 Bumbu Sauce
Bumbu Sauce's picture

Obamacare froze and/or destroyed more capital than any other government action in history.  And it hasn't even been fully implemented yet.

Fri, 04/17/2015 - 11:09 | 6003002 chunga
chunga's picture

It's been a long time since I read The Jungle but it just seemed to me he got tired of writing it and ended the story really quick. Either that or he wrote another ending and chose to hastily chop it out.

Oh well, he's got a lot of good quotes.

“Wall Street had been doing business with pieces of paper; and now someone asked for a dollar, and it was discovered that the dollar had been mislaid.”
? Upton Sinclair

Fri, 04/17/2015 - 11:14 | 6003021 Glass Seagull
Glass Seagull's picture

 

 

2016:  Humans found to be breathing too much oxygen, slowing down their conspicuous material consumption habits

2017:  Robots displace 25% of the unskilled labor force, who are then forced on to the govt. transfer payment system, high MPC demand collapses

2018:  An algorithmic error causes robots to go apeshit, and kill 35% of the human race.  Algo fixed, but demand falls by 35%.

Fri, 04/17/2015 - 11:15 | 6003025 QQQBall
QQQBall's picture

Growth Recession.. Huh? LOL

Fri, 04/17/2015 - 11:20 | 6003041 GRDguy
GRDguy's picture

2010 - The banksters lied and stole, and didn't go to jail.

2011 - The banksters lied and stole, and didn't go to jail.

2012 - The banksters lied and stole, and didn't go to jail.

2013 - The banksters lied and stole, and didn't go to jail.

2014 - The banksters lied and stole, and didn't go to jail.

2015 - The banksters are still lyin' and stealin', and haven't gone to jail.

Anybody see a pattern here?  

That's why we're f**k*d. Crime pays way too well.

Fri, 04/17/2015 - 11:20 | 6003043 silverer
silverer's picture

I wonder how long "My dog ate my homework" is going to work?

Fri, 04/17/2015 - 12:21 | 6003256 BeerMe
BeerMe's picture

Fucking nonsense!

2010 growth recession - nice doublespeak

2013 fiscal restraint - I guess not using as much credit is bad?

2014 The weather lead to a permenent loss of growth.  What happened to all that pent up demand when things thawed out?

Hang 'em!  They are insane.

Fri, 04/17/2015 - 12:46 | 6003354 Everyone is lying
Everyone is lying's picture

No group of people are collectively that incompetent for that many years.

There is another explanation.

Just tell the truth, "We are in the pockets of the Fed and are their puppets so we will say anything they want us to say."

 

See, that wasn't hard, was it?

 

Fri, 04/17/2015 - 17:49 | 6004502 Gab Timov
Gab Timov's picture

"2014: The polar vortex delayed economic activity and led to a permanent loss of growth."

What a convenient scapegoat for complete lack of development of lasting fundamental economic health in the US. The model has been for the last few decades, one of sending factories to othe countries. Can't repeat that enough. Because it's true. It's the true reason why the US economy is in the shitter, but some people make money off it and consumers enjoy lower priced products...BUT that could never last forever, and it isn't lasting. Thanks banksters.

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