More: Why Fed economic forecasts are bad ….

Earlier this week we posted Nums: Why’s the Fed so bad at forecasting?

We cited Nate Silver’s thesis that economists’ forecasts are generally poor for 4 main reasons:

  1. Complexity makes it hard to to pin down cause & effect.
  2. The economy is dynamic, especially subject to policy jolts
  3. Economic data is imprecise and subject to large revisions
  4. Forecasts often reflect political bias … pro and con.

On cue, the Feds released released their revision to Q1 GDP …

Based on revised data, the economy grew at a 1.8% annual rate in the first quarter,  well below previous estimate of 2.4% growth.

The biggest change was a cut in the government’s estimate of consumer spending which is more than 70% of the economy.

Consumer spending growth dropped to 2.6% from 3.4% growth.

 

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Source: USA Today

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The revision — .6% – may initially sound like loose change, but it’s a 25% miss.

So, economic models that operating on the original (higher) estimate have a starting point that is off by 25%.

The error compounds over time.

It’s a version of what theorists call chaos theory … how a seemingly small variation at a starting point can compound into a major effect over time.

= = = =

Side note: And, in the “new normal” economy, the downward revision was good for the stock market since it puts pressure on the Fed to continue pumping money into the economy … the bulk of which is flowing straight to the stock market.

Go figure.

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