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Utilizing Revealed Biases to Get a More Likely Forecast of Real GDP Growth [Wonky]

(Analysis) Forecasts of real GDP growth by the Federal Reserve System (Fed) have consistently been too optimistic since the end of the 2008-9 recession. Simply taking their June 2011 forecast for 2012 and comparing it to realized growth of real GDP in 2012, and doing the same for their June 2012 forecast for 2013 and comparing it to the over-the-year growth through March 2013, one can get an estimate of bias in the published central tendency for the Fed’s forecasts of real GDP growth in the month of June.

Assuming that their bias is still optimistic and to the same degree, a plausible forecast for 2014 based on a very simple calculation is somewhere between 2.2% and 2.3%. Using a similar technique, a plausible forecast for 2013 is coincidentally 1.8%; this compares with an annualized quarterly rate reported by the US Bureau of Economic Analysis of 1.8% for the first quarter of 2013 (the over-the-year rate through 2013q1 was merely 1.6%). A forecast of 1.8% for real GDP growth in 2013 is contrary to popular consensus about an economy that is finding its footing, but it could be consistent with recently reported downward revisions to estimates of real GDP.

Again, this is a back-of-the-envelope kind of calculation that assumes the Fed’s optimistic bias remains unchanged. We’ll have to wait and see if this simple calculation is a better forecast for real GDP growth in 2014 than the current Fed forecast of 3.0% to 3.5% (the current Fed forecast for real GDP growth in 2013 is 2.3% to 2.6%).

NOTE: these forecasts are assumed to ignore the planned revision to how GDP is calculated by the US BEA.

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