Planning for the future involves taking into account potential changes in the economy, such as those in income, the job market, and interest rates. They may also seek guidance from professional forecasters.
The state of the American economy in 2023 is a topic of significant discussion right now. However, the broad agreement among expert analysts and FOMC members is that economic growth would be moderate and inflation will decline from its high rates in 2022. Additionally, experts anticipate that the labour market will start to calm down from its recent high. The picture is, however, subject to numerous concerns, such as increased global inflation, slower development in China, and a cooling domestic home market.
These economic estimates are rarely entirely accurate, according to the forecasters’ historical track record, but they do contain useful information that cannot be learned from simple projections. How likely is it that the economy will follow experts’ predictions in 2023? And how wrong will they be if they are mistaken, as they have in the past?
I consider the forecasters for the following year that were included in the December Blue Chip survey of roughly fifty expert economic forecasters. Although I utilize data from the December report, these forecasts are updated on a monthly basis. While the predictions of each individual forecaster are given, the “consensus,” or an average of all forecasters, is traditionally the most reliable and attracts the greatest interest. The discrepancy amongst forecasts can also reveal important details about the relative risk to the outlook and the range of potential outcomes based on the data at hand.
The real GDP growth, CPI inflation, unemployment rate, and 10-year Treasury yield are the four major economic indicators for which Blue Chip forecasters are provided in the first three rows of the table for 2023.
The forecast for real GDP growth in 2023 is expected to be 0.3%, which is the second-weakest real GDP growth forecast since 1993. Only once in 2007–2008 was there a December projection for real GDP growth that was less than 1%. 1 However, there is some optimism, as shown by what follows:
. The top 10 projections for GDP growth rate have an average of 1.3%.
. The worst 10 projections for the unemployment rate have an average error of 3.9%.
. The average of the bottom 10 predictions for interest rates and inflation is 3.1% and 3.4%, respectively.
How likely is it that 2023 will play out as these experts predict?
The forecast performance for the years 1993 to 2022 is reported in the bottom three rows of the table. The percentage of years where the actual data fell between the bottom 10 and top 10 average projection ranges is the first metric. Less than half of the time (46.7%) the actual values of real GDP growth fell within this range of predictions.
Although this may appear to be a terrible performance, considering the variety of historical views, it actually might be rather impressive. Since 1993, the actual real GDP growth rate has varied by 8.7 percentage points, from -2.8% to 5.9%. Real GDP growth is expected to increase by 1.8 percentage points in 2023, which is higher than the historical range of around 1 percentage point. Considering past performance, Whether actual real GDP in 2023 will fall within this rather small range of -0.5% to 1.3% is effectively a coin flip.
Mean Absolute Forecast Error (MAFE), the second metric, uses previous forecast performance to determine the range in which actual values should fall. This metric offers more proof that these forecasters frequently match the actual numbers.
According to the MAFE for the real GDP growth projection, which is 1.0%, the actual real GDP growth value will fall between a range of 1% above and 1% below the consensus forecast if the real GDP growth forecast is inaccurate relative to its historical average: The actual value for 2023 should fall between -0.7% and 1.3%, while the consensus projection for that year is 0.3%.
Indicating whether the consensus estimate is skewed—that is, whether it has historically missed in a particular direction—is the last measurement, mean forecast error (MFE). The MFE is typically close to zero for most indicators, showing little to no forecast bias in either direction. The MFE on the 10-year, however,
Forecasters have often expected higher interest rates by an average of 50 basis points, as seen by the Treasury yield forecast of -0.5%. This outcome is consistent with the observation that since 1993, forecasters have continuously failed to correctly predict the long-term decline in interest rates.
Conclusion
Overall, the outlook for 2023 economic growth is substantially less positive than analysts have typically expected, and a recession could be among the possible outcomes. Due to the fact that historically, forecasters have not been successful in identifying when real GDP growth will be negative, one could be hesitant to believe a recession prediction in the forecast. Recessions often happen infrequently and are brought on by unanticipated shocks. However, realized values have generally fallen within a
