Inside the Crystal Ball: How to Make and Use Forecasts
Format: PDF / Kindle (mobi) / ePub
A practical guide to understanding economic forecasts
In Inside the Crystal Ball: How to Make and Use Forecasts, UBS Chief U.S. Economist Maury Harris helps readers improve their own forecasting abilities by examining the elements and processes that characterize successful and failed forecasts. The book:
• Provides insights from Maury Harris, named among Bloomberg's 50 Most Influential People in Global Finance.
• Demonstrates "best practices" in the assembly and evaluation of forecasts. Harris walks readers through the real-life steps he and other successful forecasters take in preparing their projections. These valuable procedures can help forecast users evaluate forecasts and forecasters as inputs for making their own specific business and investment decisions.
• Emphasizes the critical role of judgment in improving projections derived from purely statistical methodologies. Harris explores the prerequisites for sound forecasting judgment—a good sense of history and an understanding of contemporary theoretical frameworks—in readable and illuminating detail.
• Addresses everyday forecasting issues, including the credibility of government statistics and analyses, fickle consumers, and volatile business spirits. Harris also offers procedural guidelines for special circumstances, such as natural disasters, terrorist threats, gyrating oil and stock prices, and international economic crises.
• Evaluates major contemporary forecasting issues—including the now commonplace hypothesis of sustained economic sluggishness, possible inflation outcomes in an environment of falling unemployment, and projecting interest rates when central banks implement unprecedented low interest rate and quantitative easing (QE) policies.
• Brings to life Harris's own experiences and those of other leading economists in his almost four-decade career as a professional economist and forecaster. Dr. Harris presents his personal recipes for long-term credibility and commercial success to anyone offering advice about the future.
habits, and techniques that have enabled me to build a reasonably successful track record during my almost four-decade career in professional forecasting? What have I learned from both the successes and failures of the many economists and securities analysts with whom I have worked? In addressing these questions, my initial focus is on what it 27 28 INSIDE THE CRYSTAL BALL takes to achieve good long-run forecasting performance for a wide range of variables. Specific techniques and issues
cited my team at UBS as the most accurate forecasters across a broad range of economic data over a two-year period.2 Earning these accolades has been a long and exciting journey. When I first peered into the crystal ball of forecasting I found cracks. I had joined the forecasting team in the Business Conditions Division at the Federal Reserve Bank of New York in 1973—just in time to be an eyewitness to what would become, then, the worst recession since the Great Depression. As the team’s rookie,
economic planning and reducing the time and resources that had been focused on hedging inflation risks. This conclusion was just the opposite of what he saw to be earlier monetary policymakers’ mistaken belief that there were long-term trade-offs between higher inflation and lower unemployment. He and others also faulted monetary policymakers during the Great Inflation era for not fully appreciating how much Fed policy affected inflation. His reading of history was that when the Fed belatedly
viewpoints on how the modern economy functions, there are many theories from which to choose. Moreover, my experience is that both makers and users of forecasts often change (or at least consider changing) their fundamental views during their careers. For instance, during the booming years of the 1960s, a Time magazine Four Gurus of Economics 139 article at the end of 1965 proclaimed “We Are All Keynesians Now.”1 Two decades later, as the country was heading into what was then the deepest
anything approaching the Great Recession. The savings and loan crisis of the late 1980s had resulted in a credit crunch that was at the root of the 1991 recession. But it was mild by historical standards, partly because of a large-scale, temporary real estate asset purchase program conducted by the government-sponsored Resolution Trust Corporation. And the Federal Reserve had been able to orchestrate a financial industry bailout program following the collapse of the Long-Term Capital Management