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Inside the Crystal Ball: How to Make and Use Forecasts

Inside the Crystal Ball: How to Make and Use Forecasts

Maury Harris

ISBN: 978-1-118-86510-1

Dec 2014

400 pages

$22.99

Description

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.

Acknowledgments xiii

Introduction: What You Need to Know about Forecasting xv

Chapter 1 What Makes a Successful Forecaster? 1

Grading Forecasters: How Many Pass? 2

Why It's So Difficult to Be Prescient 8

Bad Forecasters: One-Hit Wonders, Perennial Outliers, and Copycats 16

Success Factors: Why Some Forecasters Excel 22

Does Experience Make Much of a Difference in Forecasting? 23

Chapter 2 The Art and Science of Making and Using Forecasts 27

Judgment Counts More Than Math 28

Habits of Successful Forecasters: How to Cultivate Them 34

Judging and Scoring Forecasts by Statistics 43

Chapter 3 What Can We Learn from History? 51

It’s Never Normal 52

Some Key Characteristics of Business Cycles 55

National versus State Business Cycles: Does a Rising Tide Lift All Boats? 62

U.S. Monetary Policy and the Great Depression 65

The Great Inflation Is Hard to Forget 68

The Great Moderation: Why It’s Still Relevant 73

Why Was There Reduced Growth Volatility during the Great Moderation? 75

Chapter 4 When Forecasters Get It Wrong 79

The Granddaddy of Forecasting Debacles: The Great Depression 80

The Great Recession: Grandchild of the Granddaddy 81

The Great Recession: Lessons Learned 85

The Productivity Miracle and the "New Economy" 86

Productivity: Lessons Learned 88

Y2K: The Disaster That Wasn't 90

The Tech Crash Was Not Okay 92

Forecasters at Cyclical Turning Points: How to Evaluate Them 96

Forecasting Recessions 99

Forecasting Recessions: Lessons Learned 101

Chapter 5 Can We Believe What Washington, D.C. Tells Us? 105

Does the U.S. Government "Cook the Books" on Economic Data Reports? 106

To What Extent Are Government Forecasts Politically Motivated? 109

Can You Trust the Government's Analyses of Its Policies' Benefits? 114

The Beltway’s Multiplier Mania 120

Multiplier Effects: How Real Are They? 124

Why Government Statistics Keep “Changing Their Mind” 127

Living with Revisions 133

Chapter 6 Four Gurus of Economics: Whom to Follow? 137

Four Competing Schools of Economic Thought 139

Minskyites: Should We Keep Listening to Them? 140

Monetarists: Do They Deserve More Respect? 149

Supply-Siders: Still a Role to Play? 156

Keynesians: Are They Just Too Old-Fashioned? 161

Chapter 7 The "New Normal": Time to Curb Your Enthusiasm? 171

Must Forecasters Restrain Multiyear U.S. Growth Assumptions? 173

Supply-Side Forecasting: Labor, Capital, and Productivity 175

Are Demographics Destiny? 179

Pivotal Productivity Projections 184

Chapter 8 Animal Spirits: The Intangibles Behind Business Spending 199

Animal Spirits on Main Street and Wall Street 201

Can We Base Forecasts on Confidence Indexes? 207

Business Confidence and Inventory Building 208

How Do Animal Spirits Relate to Job Creation? 213

Confidence and Capital Spending: Do They Move in Tandem? 217

Animal Spirits and Capital Spending 226

Chapter 9 Forecasting Fickle Consumers 229

Making and Spending Money 230

How Do Americans Make Their Money? 231

Will We Ever Start to Save More Money? 237

Why Don't Americans Save More? 239

More Wealth = Less Saving 240

Do More Confident Consumers Save Less and Spend More? 248

Does Income Distribution Make a Difference for Saving and Consumer Spending? 250

Pent-Up Demand and Household Formation 252

Chapter 10 What Will It Cost to Live in the Future? 259

Whose Prices Are You Forecasting? 260

Humans Cannot Live on Just Core Goods and Services 261

Sound Judgment Trumps Complexity in Forecasting Inflation 266

Should We Forecast Inflation by Money Supply or Phillips Curve? 271

Hitting Professor Phillips' Curve 271

A Statistical Lesson from Reviewing Phillips Curve Research 280

Chapter 11 Interest Rates: Forecasters' Toughest Challenge 285

Figuring the Fed 288

Federal Open Market Committee 288

What Is the Fed's "Reaction Function"? 290

Is the Fed "Behind the Curve"? 293

Can the Fed "Talk Down" Interest Rates? 294

Bond Yields: How Reliable Are "Rules of Thumb"? 294

Professor Bernanke's Expectations-Oriented Explanation of Long-Term Interest Rate
Determinants 297

Supply and Demand Models of Interest Rate Determination 299

When Will OPEC, Japan, and China Stop Buying Our Bonds? 302

What Will Be the Legacy of QE for Interest Rates? 304

What Is the Effect of Fed MBS Purchases on Mortgage Rates? 309

Will Projected Future Budget Deficits Raise Interest Rates? 309

Chapter 12 Forecasting in Troubled Times 315

Natural Disasters: The Economic Cons and Pros 316

How to Respond to a Terrorist Attack 321

Why Oil Price Shocks Don't Shock So Much 325

Market Crashes: Why Investors Don't Jump from Buildings Anymore 332

Contagion Effects: When China Catches Cold, Will the United States Sneeze? 334

Chapter 13 How to Survive and Thrive in Forecasting 341

Surviving: What to Do When Wrong 345

Hold or Fold? 348

Thriving: Ten Keys to a Successful Career 349

About the Author 355

Index 357