COLUMN-Forecasting fog as thick as ever: McGeever

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(The views expressed here are those of a columnist writer for Businesshala.)

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ORLANDO, Fla., Nov. 17 (Businesshala) – If we still can’t trust the numbers, should economic policymakers and investors just sit tight?

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In early September, the New York Federal Reserve suspended its real-time, GDP growth tracker because the wildly distorted economic data of the immediate post-COVID world was unreliable.

“The uncertainty surrounding the pandemic and the resulting volatility in data presents several challenges to the Nowcast model,” the New York Fed posted on its site.

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While other major institutions have yet to follow suit, the world of economic forecasting remains largely in a state of suspended animation.

A government-mandated world recession is without modern historical precedent. There are virtually no comparable models to attract economists, investors and policy makers, which leaves enormous uncertainties about the new world to emerge.

And the biggest casualty has been cyclical or trend-driven analysis, which investors have had for decades.

Simply put, you’ve taken any confident predictions about employment, growth and inflation over the next year or two with a big pinch of salt.

A look at Citi’s economic surprise index, which measures whether incoming data is either beating consensus forecasts or missing, showing how uncertain the numbers are.

Between 2003 and February last year – before the start of the pandemic – the average weekly change in the overall G10 surprise index was just 0.03 points. From March 1 last year, this average change increased to 0.3 – 10 times larger.

The index’s peak and bottom are far more extreme, meaning the weekly surprise’s standard deviation has more than doubled from 7.5 to 17. A low standard deviation indicates that the data are clustered around the average, and a high reading suggests that they are much more widely spread.

It is a similar pattern across individual economic sectors. Comparable figures for the US Economic Surprise Index are low, but significantly higher for the euro area, where the pandemic-era weekly surprise is 20 times higher than the average over the past 17 years.

Action or Patience?

These numbers, of course, have been greatly reduced by the initial lockdown in the months after March 2020, which brought large parts of economic activity around the world to a decisive halt and an astonishingly strong and quick rebound.

Willem Buiter, assistant professor of international and public affairs at Columbia University and former policy maker at the Bank of England, agrees that forecasting is more difficult now.

“We have information, even though it is sometimes difficult to interpret. You have to be more careful in interpreting it because general cyclical patterns are up in the air, as is our understanding of economic trends really,” he says.

This does not mean that textbooks should be dismissed outright, nor should it prevent policymakers from turning to them for guidance on where to turn next. The economic fundamentals still apply.

As Buiter puts it: “We have to look for words we haven’t used before. But we know how to pronounce them.”

But the effects of the pandemic are still skewing the data, nowhere more so than inflation. This is the highest in decades and is well above central bank targets in many parts of the world, exacerbated by supply constraints, shortages, high food and energy prices and, yes, rising demand.

Buiter is part of a rapidly growing phalanx of prominent academics, financial market veterans and former policymakers urging the Fed to reconsider its position that inflation is still “temporary.”

Before the Great Financial Crisis, the Fed would almost certainly raise interest rates with annual inflation running at 30-year highs. But the 2007-09 mark is darker, meaning the gap between rock-bottom policy rates and inflation has never been bigger.

Similarly, the fog of uncertainty over the post-pandemic economic data and policy outlook has rarely been thicker.

“It’s risky to act without clarity,” San Francisco Fed Chair Mary Daly said on Tuesday. “In the face of unprecedented uncertainty, the best policy is recognizing the need to wait. Although it may be difficult, in the end, patience is the hardest thing we can do.”

by Jamie McGyver; Editing by Andrea Ricci


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