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The Intimidation of Consensus Forecasting

1 min readBy: Leif H. Olsen

Download Special Report January 1984

Special Report January 1984

Executive Summary A year ago at this time and in this setting, the fashionable view was that economic recovery had not yet begun and as it unfolded in 1983 it would be very moderate. As we now know, that view was wrong inasmuch as the recover y which began in December of 1982 has turned out to be twice as strong as most people expected in spite of rather high interest rates that were expected to be a restraining force. Those who treat monetary policy as a major element in their forecasting were less surprised than others. A sustained spell of very rapid money growth signaled early on a relatively strong recovery, at least in the first two or three quarters.

Now we find ourselves looking ahead to 1984-85 in which the consensus view holds that economic recovery will continue through 1984 at a more moderate pace, say, about 4 % compared to the 6% or 7% we have experienced in the past four quarters. InflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. is expected to accelerate, particularly in the second half of the year and grow worse in 1985. Interest rates are expected to increase along with the maturing of the recovery and the rise of inflation.

Forecasters of a more cynical bent point out that 1984 is a presidential election year and, therefore, nothing can be al lowed to go wrong, even though history does not especially support that view.

Will the fashionable view be surprised again by the actual events of 1984? Before I answer that question, I would like to discuss for a moment the pitfalls of consensus forecasts.