Friday, October 6, 2017

Latest unemployment data

New unemployment data is out, so it's time to check to see how the forecasts are doing compared to reality. First, I want to throw out two forecasts as rejected: one from me, and one from the FRBSF. I started putting them on the same graph with the dynamic equilibrium model here, but the original forecast of mine was made as part of my effort to come up with way to forecast recessions. With what I know now, I wouldn't have made this forecast — the tolerance for positing a recession was too low and would have choked on earlier data if used in this model.

Here is the graph with the latest unemployment data on it:


The gray forecast assumed a recession was happening in the next few quarters, while the red dynamic equilibrium forecast assumes no shocks. The former is resoundingly rejected. Now how about a statement from the FRB SF rejecting their previous forecast?

Instead of rejecting their previous forecasts, the FRB SF has continually been updating their forecasts over time as the future they predict fails to materialize (which I noted in this post making the point that forecast instability is a sign you have the wrong model, and it's the point I am making with this gallery). I've also added the FOMC's forecast to the series of head to heads:



The FOMC does basically the same thing, which I've emphasized by adding in their December 2014 forecast in purple.

Update

The FRB SF has yet another forecast update, which I have added to the graph above:


This kind of forecast updating would be fine if it a) was stable, and b) had a longer period of success relative to the forecast length. If a forecast is made for a couple years in the future but only works for a couple of months, you should stop forecasting longer than a couple of months.

The thing is that if there is a recession that starts in the next couple years, the latest forecast will be seen as correct despite the fact that nearly every prior forecast was wrong over this length of time. It is unscientific. Much like the perpetual pessimists always forecasting a recession being seen by some as being successful when a recession happens (Hello, Steve Keen!), it is a failure of Feynman's "leaning over backwards" to reject your own theories and models.

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