Be wary of economic forecasts

David MoonBlog

If a group of the country’s leading economists can’t even come close to forecasting the near-term health of the U.S. economy, you don’t have a chance of consistently guessing accurately. And whether you stick your finger in the air or rationalize your forecasts with reems of data and massive spreadsheets, a short-term economic forecast ultimately is little more valuable than the toss of a coin.

A year ago, the consensus among experts was that higher interest rates would push the U.S. into a recession in 2023. The WSJ experts placed the probability of recession last year at 61%, a historically high figure for this survey. Instead, the U.S. economy grew an estimated 3% last year.

Interestingly, the last time the survey placed the likelihood of a recession this high was in April 2020, when economists asserted there was a 96% probability of a recession – after that year’s brief recession was already over. That is akin to me making the bold prediction that there is a 96% chance Michigan will defeat Washington for the college football national championship.

The most recent survey, in October, finally produced a consensus that the U.S. would not enter a recession in 2023. This wasn’t a terribly risky forecast, as by then the U.S. had already produced 9 consecutive months of economic growth for the year.

The next survey will be released the week of January 14. I expect the consensus to conclude there is little likelihood of a recession in 2024. I wouldn’t place too much credence on that forecast – not because I think we will have a recession this year – but because I would never place any credence on economic forecasts.

Three years ago, the financial press was fawning over Claudia Sahm, a former Federal Reserve economist, for developing something she called the Sahm Rule. This rule gained acclaim because it had accurately and quickly predicted every recession since 1960. This historically foolproof rule received much attention a year ago when it indicated that the U.S. would enter a recession in 2023.

Except it is worth noting that Dr. Sahm didn’t actually publish her “rule” until 2019. She wasn’t even born until 1976. The claimed 60-year perfect “track record” was based on fitting a system to the historical data. Using similar logic, I could pretty easily create a rule that accurately predicted each of the previous 57 Super Bowl winners. In real time, the Sahm Rule has predicted a grand total of two recessions, with only one of those forecasts being accurate. That equates to a 50% accuracy rate – or the same as flipping a coin.

David Moon is president of Moon Capital Management. A version of this piece originally appeared in the USA TODAY NETWORK.