Word: forecasting
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Getting data on cloud cover isn't easy. There is reliable information from satellites, but those only go back a few decades - not long enough to provide a reliable forecast for the future. Clement and her colleagues combined recent satellite data with human observations - literally, from sailors scanning the sky - that go back to 1952, and found the two sets were surprisingly in sync. "It's pretty remarkable," says Clement. "We were almost shocked by the degree of concordance...
What might help us better use economic forecasts, then, is to more explicitly take into account the limits that come with any forecast. You wouldn't find an economist publishing a paper in a journal without margins of error around the data - and yet we routinely drop such nuance when we talk about economic variables in public conversation. "One of the things that gets lost is the fact that there are ways of trying to assess errors in forecasts," says Robert Eisenbeis, a former researcher at the Atlanta Fed who is now chief monetary economist at the money-management firm...
...compensate is to pay attention to a broader range of forecasts. That's why there's no shortage of publishing and financial firms surveying groups of economists, presenting all of their opinions as "consensus" forecasts. A 2003 study by researchers at the Federal Reserve Bank of Atlanta found that the Blue Chip Consensus Forecast, which polls some 50 economists each month, is consistently better than any of its individual members. The researchers dubbed that result a "reverse Lake Wobegon effect": everyone was below average. During economic turning points - like the one we're currently in - the individual forecasts veered further...
There's an easy way to represent this visually: the fan chart. What starts as a line quickly becomes a blurry fan-shaped region, underscoring that as time marches forward, the variable being forecast falls into an ever broader range of possibilities. "The more you think in terms of distribution of outcomes, the better," says Gregory Mankiw, a Harvard economist who chaired President George W. Bush's Council of Economic Advisers. "You're always keeping in mind the inherent uncertainty." The Bank of England is a big user of the fan chart when its economists talk about inflation forecasts. Plenty...
Highlighting the imprecision embedded in any forecast would help when we then go on to, say, evaluate whether a public-policy initiative - like a $787 billion stimulus package - is changing the outcome of events. Is unemployment lower than it would have been otherwise? A good starting point is being realistic about our limits of knowing what unemployment would have been otherwise...