V N In evaluating economic forecasts, one should consider the null hypothesis, which is Milton Friedman's, that the expected change in GNP next quarter, adjusted for part/whole effects and overlaps, is a constant 3% a year, regardless of the previous conditions.

John De Palma replies:

GDP forecasts of Wall Street economists and the Fed improve only a bit on "naive, same change" predictions (i.e. predictions that "future growth rate will be the same as the most recently observed growth rate"). Former St. Louis Fed President William Poole summarized research on forecast accuracy as part of a February 2004 speech:

"(…)The authors compared the Blue Chip forecasts, the Greenbook forecasts, and the FOMC members' forecasts against a naive, same change, forecast beginning in 1980 for both real output growth and inflation. Three different forecasting horizons were examined: six, twelve and eighteen months. Not surprisingly, the accuracy of the forecasts deteriorates as the forecasting horizon is lengthened. For a one-year-ahead forecast, the root-mean-squared forecast error (a measure of the dispersion of the forecasts around the realized value) for real output growth is on the order of 1.4 percentage points for all three sets of forecasts considered. The root-mean-squared forecast error for the naive constant change forecast is considerably larger, on the order of 2.2 percentage points.

Clearly, the forecast accuracy of the forecasters is substantially better than that of the naive forecast, but still leaves a lot of room for surprises. To make this point clear in today's context, if for convenience we say that the GDP growth forecast is 4½ percent over the four quarters ending 2004:Q4, then one standard error leaves us with a forecast band of 3 - 6 percent growth over this period. If we were to have a 3 percent outcome, everyone would fear that the recovery is faltering; if we were to have a 6 percent outcome, the most likely characterization would be that we have a boom on our hands(…)"





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5 Comments so far

  1. Craig Bowles on August 5, 2008 6:22 pm

    Despite the decline in commodity prices, companies issued a number of price increases today. So, the inflation lag is one reason why it’s the hardest economic component to predict and often hangs around longer than anyone would expect. Economists almost always underestimate inflation and that’s why they were so useless during the 1970s.

  2. Haralampos Shahpazidis on August 6, 2008 12:09 pm

    the reason is- to contact directly to Victor and Laurel,- i have some question that i realy need to answer,-. it wiil be strange for you - byt i hope you will understand ,and give a litle atention to my message..– before 4 ears when i went to university in Russia,city Krasnodar, i heard about forex- and the ease as i think way to make money,- it was a competition for me to reach ,and make money-to give for my father with word-(it is for you dad , and yuo can go to the restaurant with mam) it was the best think for me,.- but i lost my first 500 usd(not a lot)for you ,- then as every body do- i start to read books,. all that i find,- and even english books,- i was making translation on greece or russian to understand them(books) now i am 23 ears old- i am still reading and after 4 ears i opend an acount in saxo bank,- to trade eur/usd - my mom give me 10000eur,. the worst thing is that she worked wor this money for 1 ear (she cleans in the hotel) ,- and i lost 80% of them in 1 month,- at this point i dont know what to do,.- if there is any advise from you,- i will do anithing- belive anithing if you can give it to me,.- it is dificult for person with my character to write this to some one i dont know,.- byt i know you had a teacher ,- and i need some one - and i can,t find,. i realy want to understand how to make profit in markets ,…i live in Cyprus - if there is any thing that you need ,- i can help.,- mabe you can sty here for holidays,- or anything - i can help….. i dont want you to think that i am the poorest person in the world that looking for help,at this point i just dont understand my problem, maibe i am not smart for this,- and if some one birn to fly hi is flying- if some one birn to walk hi is walkin.but i really bealive in good people ,that can help. if you need any body to wor in oficce with papers,- i can do it for free , i will cut my university and - will come to Amarica to learn and work- to find success in markets,. that all i wanted to write,. waiting for reply…

  3. Alex Castaldo on August 6, 2008 1:01 pm

    How often do retail FX speculators make money? Some sobering statistics were given in a post on this web site a year ago by Larry Williams.

  4. vic niederhoffer on August 7, 2008 11:02 am

    I would advise to stick to the stock markets. They have a positive drift. Wait until things look very bad, especially when they continue at the beginnings of periods. Then don't get in over your head, and never have a position where the value of the underlying is above twice your net worth committed to this project. I like Greek food, and I understand they play checkers in the streets, which is the only game I am somewhat competent at these days. vic

  5. Haralampos Shahpazidis on August 7, 2008 5:47 pm

    evharisto Victor, Alex, thanks for post-it is hard to belive, how 80-60 close the ear with profit, from thausands- where all the money,. i opend my account at saxo bank.-is it the same broker that can take my money by taking stops or other tning that coment in post Of Larry Wiliams (IT IS LATE FOR ME TO BELIVE IN THIS I DONT KNOW HOW TO TRADE- WITH OUT FEER TO LOOSE ALL THE MONEY (IT IS ONLY 2349 EUR- TO RISKY AND TO LATE TO THINK(ANY WAY IT IS PLEASURE FOR ME TO WRITE TO YOU Victor -and i understand your advise- and i hope it will help. food is superb,- but it is diferent here in cyprys- the cypriot have changed alot - they have influence of tyrkish meals,- all mixed up,. try MEZE IT IS A SPECIAL MEALE,- IT CAN BE SEA MEZE ,WHICH IS THE BEST -WITH MEDITERANEAN SEA PRODYCTS……………………………
    I have a friend in russia that made 900% of his acount in trading future at FORTS EXCHANGE (5 MONT PERIOD).- BUT THERE IS NO LIQUDITI,- WHEN YOU START WITH AMOUNT MORE THAN 50000USD VITH LEVEREGE 1.8 ,- MARKET MOVES as YOU WANTED,- AND IT DIFICYLT TO FIND BYERS OR SELLER IN GOOD SPEED,- HI IZ A SCALPER.his system or the way hi was trading was simple,- when stock break out- hi sell future,. how simple,. and i cant do it becoyse of bad people that live in my mind- they belive that fx is good markets to trade,. is there some one who trede fx in long profit periods,.-SORRY FOR INTERUPT THE AGEDA Economic Forecasting, from Victor Niederhoffer, I HOPE IT IS NOT SO DIFICULT TO UNDERSTAND MY ENGLISH- I NEVER LEARNED IT,.IT IS CINEMA AND SOME BOOKS HELPED ME TO WRITE,..


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