Economic Forecasting Evaluation: Re-examination of the Track Record of Macroeconomic Forecasting
When a forecasting technique is selected, economists and statisticians would like to evaluate the technique for its ability to forecast accurately. Normally an error-a difference between the actual value and its forecast-is assessed in different forms. There is no single measure of error that would capture accuracy in its entirety. There are techniques to measures accuracy in terms of magnitude and also in terms of direction. Each measure captures different aspect of accuracy and provides a good insight into the capability of the forecasting technique. The measures we have overlap and provide some exclusive information from one another but not exhaustive information in terms of accuracy. As a result, the outcome of a measure may be sufficient and helpful for one user but inadequate or even misleading for the need of the other. The Wall Street Journal (WSJ) has been polling its panel of economists on their predictions for short-term interest rates, long-term interest rates, consumer price index, gross domestic product, unemployment rate, and dollar to yen exchange rates since 1981. Some research has been done to assess its accuracy (See Cho 1996, Cho and Hersch 1998, and Greer 1999 and 2003 among others; also see C. M. Ford, "littmann, Top Forecaster, Interprets Nation's Economy Based on Midwest," The Wall Street Journal, Eastern edition, 1, July 7, 1998.) Mark Greer (1999) tried to determine how often The Wall Streetlournal's forecasters correctly predict the direction of change in the macroeconomic variables and found an overall forecast accuracy of 49 percent-not much different from the expected value of a random forecast-generating mechanism. This paper re-examines WSJ forecasts under an alternative measure of directional accuracy and shows the results to be quite different. This study uses the same data used by Greer (1999) to compare the results. In more recent years WSJ has changed the format of its reporting. The foreign exchange rate that it used to report was U.S. dollar to yen; now it is U.S. dollar to euro. The long-term interest rates used to be thirty-year bond rates; now they are ten-year bond rates. The unemployment rate became erratic; the methodology of its estimate was changed at least twice. GDP values are revised by the Department of Commerce; forecasters might not possess the new values at the time of making their forecasts. As a result, some forecasts