THE PURPOSE OF ECONOMIC FORECASTING IS TO MAKE ASTROLOGERS LOOK GOOD
2014 was a year that confounded forecasters. We admit our own mistakes first: we were worried about a market correction of 10%-plus, and it just didn’t happen. As a result our modest investment in derivative protection turned out to be unnecessary, but my equity fund has nonetheless recorded a return of more than 14% for CY2014, significantly above the S&P/ASX200 accumulation return of 5.68%.
The record of economic forecasters demonstrates very clearly why we don’t use economic forecasts as inputs. The USA is the world’s largest economy: its 2013 GDP of USD 16.8 trillion makes up 22% of global GDP and is eleven times the size of Australia’s GDP. As New York city is the world’s largest financial centre, you would think that Wall Street economists are smart enough to forecast the US economy. Not so, according to the Wall Street Journal (31 Dec 2014), which points out that consensus forecasts completely missed their targets for five key variables in 2014:
|Economic variable||Consensus forecast||Actual outcome|
|Interest rates (10 year Treasury yield)||3.52%||2.17%|
|Payroll growth (av. Mthly change)||200,000||241,000|
|Crude oil price at Dec 2014 in USD||94.65||53.27|
The professional forecasters were clearly too pessimistic. Job creation was faster than expected, so unemployment fell. Inflation and interest rates remained low. And oil prices have halved since June. The US economy has performed better than expected, especially for the ordinary consumer, and this helps explain why the US share market has hit new highs recently and the US S&P500 index returned 13.68% in 2014. But we still think that there is a correction lurking somewhere out there in 2015!