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Economic forecast: Little reliability

Jeff Tyler Oct 19, 2007

Economic forecast: Little reliability

Jeff Tyler Oct 19, 2007


TESS VIGELAND: We mentioned earlier that oil topped 90 bucks a barrel for the first time today. The price of crude is up a whopping 28 percent just since late August. And as you may have noticed at the corner station, the retail price of gasoline headed higher this week — up 5 cents to an average of $2.82 a gallon according to AAA.

To put it in perspective, that’s just 1 cent higher than the price of gas one month ago. You may remember that, about a month ago, there was talk of more pain to come at the pumps. But it didn’t quite work out that way. Marketplace’s Jeff Tyler considers the margin of error in economic forecasting.

JEFF TYLER: When I spoke to oil analyst Tom Kloza last month, he predicted gas prices would climb in the coming weeks. But up until the last few days, prices had been falling. What went wrong?

Tom Kloza: You know I’m probably guilty, like a lot of people, of miscalculating the market’s ability to inflict pain and gain.

Gas station owners have been feeling the pain. They tell Kloza that, contrary to the buzz on Wall Street, the economy seems to be softening. These retailers say consumer and commercial demand for gas is flat. That makes it hard to raise prices. But there’s another variable at play here.

Kloza: There’s a tremendous margin of error.

And not just in predicting the price of gas. Jared Bernstein does some economic forecasting at the Economic Policy Institute. I asked him if he knows how often he’s wrong.

Jared Bernstein: Not for public consumption.

I promised nobody’d be listening.

Bernstein: I’d say I get it wrong about 30 percent of the time.

This year, it so happens, Bernstein’s forecast for poverty rates and income was right on the money.

Bernstein: That makes up for the year before, when I was just way out of the ballpark.

While he considers economic forecasting a valuable tool, Bernstein is aware of its flaws.

Bernstein: Most of the time, we’re looking in the rearview mirror. And most of the time, that serves us well. But when things change and there’s a big turning point in the economy, it’s very hard for forecasters to pick that up.

Sometimes, even looking backwards it’s hard to pick out big turning points. Consider the oil market. Tom Kloza with the Oil Price Information Service says the price of oil has fluctuated almost 40 bucks during the course of this year.

Kloza: For the first 28 or 29 years of my career, I didn’t see that much of a variation between the low and the high of 40 dollars a barrel. So this is really a special year. It’s probably something that we won’t really realize what’s happening until afterwards.

Like with the dot-com bust or the housing bubble. With those experiences behind us, you’d think we’d be better at forecasting by now. Again, economist Jared Bernstein.

Bernstein: I don’t think we’re actually doing a particularly better job than we used to. Even though the quality of our data is often better, and certainly our econo-metric skills are more advanced. The world has gotten a lot more complicated.

Complicated or not, Tom Kloza will take another crack at predicting gas prices.

Kloza: We’re looking at something next spring where we’ll probably be paying somewhere between $3 and $3.75 a gallon across the country for gasoline.

It’s a prediction that comes with this caveat:

Kloza: I reserve the right to be wrong. And terribly wrong.

That goes double for me.

Jeff Tyler for Marketplace.

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