Economic Forecasting: The Mainstream’s Horrible Track Record

Aside from the agency problem, here is another reason why economic and market predictions or forecasts by mainstream "experts" should be taken with a grain of salt.

From Wall Street Journal Economics Blog: (bold mine)

Last month, Singapore’s government announced the economy grew 3.8% on-year in the second quarter. But as late as June, economists polled by the city-state’s central bank were predicting growth of just 1.5%.

Economists got it wrong on exports too: They predicted a nearly flat print in the second quarter, when exports actually fell 5.0%.

The difference was even starker in the first quarter: Economists in March predicted exports would fall 0.5%, but in fact they shrank a whopping 12.5%.

The Monetary Authority of Singapore polls economists at banks and research firms every quarter on key local data such as gross domestic product, exports, currency, inflation and employment. The results are released at the start of every quarter, with the third-quarter survey landing Wednesday.

It turns out that the 20 or so economists who respond to the survey get it quite wrong, quite often.

Economic predictions are never easy. But they become even more complex in tiny Singapore, where trade is more than three times the size of GDP.

Why this is so? The great Austrian professor Ludwig von Mises explained (Human Action page 31): (bold mine)

The experience with which the sciences of human action have to deal is always an experience of complex phenomena. No laboratory experiments can be performed with regard to human action. We are never in a position to observe the change in one element only, all other conditions of the event remaining unchanged. Historical experience as an experience of complex phenomena does not provide us with facts in the sense in which the natural sciences employ this term to signify isolated events tested in experiments. The information conveyed by historical experience cannot be used as building material for the construction of theories and the prediction of future events. Every historical experience is open to various interpretations, and is in fact interpreted in different ways

Even non-Austrian analyst, statistician and author Nassim Nicolas Taleb calls such error Historical Determinism as I previously pointed out

Reading or interpreting past performance (statistics) into the future along with seeing the world in the lens of mathematical formalism (econometrics) are surefire ways to misinterpret reality.