Predict the future, win a prize

Bloomberg columnist John Dorfman is reviving a contest that gauges your ability to correctly predict economic conditions months from now. An economist has never won the competition. See if you can.

Dorfman describes his Derby of Economic Forecasting Talent or DEFT:

Some of the previous contests were won by financial professionals, including a Fed official in Richmond, Virginia, and money managers in Chicago and New Jersey.

Other winners were amateurs. For example, the victor one year was a recent graduate of the University of New Mexico who hadn't yet found her first job.

How could amateurs do better than actual economists at forecasting? Because it's hard:

Researchers have studied cardiologists analyzing electrocardiograms, racetrack bettors handicapping thoroughbreds, and meteorologists forecasting storms. Their studies show it is often difficult even for knowledgeable people to outperform a simple computer model.

The DEFT contest itself provides strong evidence of the challenges of forecasting. Contestants have often missed the boat whenever a key aspect of the economy veers from trend. For example, in 2003-2004 every single contestant underestimated the rise in the price of oil.

So here are the questions you must answer:

Question 1: Economic Growth. U.S. gross domestic product in the fourth quarter of 2009 was growing at an annualized rate of 5.7 percent. Growth was 2.2 percent in the third quarter, and had been negative in five of the six previous quarters. What will be the pace of economic growth in the fourth quarter of 2010?

Question 2: Inflation. The U.S. consumer price index rose 2.6 percent in the year ended January 31, 2010. Twelve months before that it was flat. What will be the comparable figure as of January 31, 2011?

Question 3: Interest rates. The interest rate on 10-year bonds issued by the U.S. Treasury stood at 3.58 percent at the end of January, up from 2.84 percent a year earlier. What rate of interest will 10-year Treasury bonds pay as of January 31, 2011?

Question 4: Oil prices. A barrel of crude oil (West Texas intermediate, spot price) traded for $72.89 at the end of January, up from $41.68 a year earlier. What will be the price of a barrel of oil on January 31, 2011?

Question 5: Retail sales. U.S. retail stores rang up $356 billion in sales in January, compared with $340 billion a year previously and $376 billion two years earlier. Rounded to the nearest billion, what will be the monthly total for retail sales in January 2011?

Question 6: Unemployment. The U.S. unemployment number is crucial in affecting public mood, consumer confidence, political fortunes and quality of life for many Americans. As of January 31, the official unemployment rate was 9.7 percent. The comparable figures were 7.7 percent in January 2009 and 5 percent in January 2008. What will be the unemployment rate as of January 31, 2011?

Here are my answers:

Question 1: I expect GDP growth to continue but at a slower pace by the end of the year. I'll say 4.5%.

Question 2: There seems to be little expectation for inflation in the short-term, but there are signs of increasing demand. And with the amount of debt being financed by the federal government, increasing inflation is a lock. It's just a question of when. I predict modest consumer inflation by early next year. I'll go with 3.5%.

Question 3: I doubt that the Fed will have moved interest rates much by the end of the 2010, unless my inflation prediction turns out to be way too low. The interest rate of 10-year Treasuries will be a tad higher -- 4.6%, but if the dam bursts before the end of next January, that yield could skyrocket.

Question 4: Since demand is on the rise, I'm guessing oil will be somewhere between $80-90 a barrel by early next year. I'll go with $85.

Question 5: I'll assume that by next January, consumer spending has bounced back to where it was two years ago. I'll say $375 billion.

Question 6: I expect the unemployment to go up later this year, as people who've not been counted as unemployed see opportunities and start looking for work. When unemployment starts falling again, I don't know. I'll say 8.5%.

To enter, e-mail John at dorfman1@bloomberg.net and share your thoughts and predictions here!

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