“It's hard to make predictions. Especially about the future.” – Quote frequently attributed to baseball legend Yogi Berra.
The Mackinac Center has made habit of holding economists accountable for the accuracy of their forecasts. I’ve publicly noted that some forecasters must have a hard time seeing the future with all that egg on their faces.
At the first of this year’s twice-annual state revenue estimating conference Sen. Patrick Colbeck, R-Canton, asked the University of Michigan economists whose testimony is a regular feature of these events to provide some particular information that should preface all their presentations. To paraphrase: How have your past predictions worked out? It speaks volumes that no good and specific answer was forthcoming from them.
In a 2009 essay, “UM Economists’ Cloudy Crystal Balls,” Mackinac Center Senior Legislative Analyst Jack McHugh compared these economists’ 2003 forecasts with what actually had occurred. Needless to say there was a wide gulf between them: Job gains were the prediction, and job losses the reality.
Here’s a quote from 2003 that did not make McHugh’s article:
“On a calendar year basis, the Michigan unemployment rate will muscle down from 6.1 percent in 2002 to 5.9 percent in 2003 and 5.2 percent in 2004.”
In December 2004 the year ended with an unemployment rate of 7.2 percent, and the average for the year was 7.1 percent. The woman who shared that prediction — U of M economist Joan Crary — also predicted personal income growth of 5.5 percent for 2004 and it ultimately was 3.3 percent, overstating the actual growth rate by 60 percent.
Another low-light of 2003’s predictions was Standard & Poor’s Chief Economist David Wyss telling Michigan’s legislators, “People are talking about a housing bubble. I think that’s the wrong way to look at it ... as long as interest rates remain low, home ownership will remain high ... home prices have just kept pace with household income ... I don't think we have to worry about a collapse of home prices.”
By the third quarter of that year the rate of growth in Michigan home prices had begun a general decline, and in 2006 the absolute trend went negative — and stayed that way for 24 consecutive quarters, according to the Federal Housing Finance Agency’s Housing Price Index. Michigan home prices did not rise again until the first quarter of 2012.
At the 2004 estimating conference — 10 years ago this month —Crary asserted, “With the turnaround in employment, (personal income) growth accelerates to 4.7 percent for 2004 and surges to 6.5 percent in 2005; you’ve got both strong gains in earned income in 2005 and also some hike in interest income due to those rising interest rates.”
Actual state economic growth in 2004 was 3.3 percent, and just 2.5 percent through 2005. In other words, this academic’s forecast overstated the growth rate for changes in the following year’s economy by 150 percent. At least the overall direction was called correctly.
On employment Crary said, “The patterns of job growth over the next two years translates into job gains of 75,700 jobs for this year and 91,000 during 2005. Employment finally exceeds the level in the trough quarter (the end of 2001) by the Spring of 2005, so it takes until Spring of 2005 just to get back to where we were in late 2001 and of course we lost jobs prior to that point as well.”
According to the Bureau of Labor Statistics payroll data, Michigan lost almost 17,000 jobs through 2004 and another 9,300 in 2005. Employment did not reach 2001 levels in 2005 as forecast, and in fact they were lower by 174,000 jobs.
To be fair, when it comes to economic predictions no one’s crystal ball is truly crystal, including the Mackinac Center’s. However, when we do occasionally make a forecast it is narrow and contains numerous qualifications. To cite one example, in May of 2009 Senior Economist David Littmann predicted a 2009 unemployment rate between 17 and 20 percent; the peak turned out to be 15.3 percent (later revised to 14.2 percent).
The forecasts mentioned here are only the tip of the prognosticating iceberg. Michigan’s “economic development” bureaucrats have made countless “micro” proclamations about how many jobs some company or industry will create only to miss the mark by a country mile.
The upshot is that anyone who makes economic predictions should salt their words and figures with a huge dose of humility, and policymakers should be exceedingly cautious about relying on any of them. Sen. Colbeck’s instincts were correct in asking about the usual econometricians’ past performance, and perhaps future forecasting events should begin with history lessons from past editions.
Michael D. LaFaive is director of the Morey Fiscal Policy Initiative at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby authorized, provided that the author and the Center are properly cited.