When Forecasters Get It Wrong
To borrow from the quotable baseball legend Yogi Berra, it is tough to make predictions, especially about the future. But 2017 was particularly difficult. On many of the biggest forecasts — global growth, inflation, the trajectory of the big powers — the experts got the year wrong.
They thought the global economy would continue to struggle, inflation would stage a comeback, right-wing nationalism would prevent economic revival in Europe and laggards like Japan, Russia and Brazil would remain weak. They expected the United States to be the one relatively bright spot and that Donald J. Trump’s promises of tax cuts and protectionism would drive the mighty dollar higher.
Instead, President Trump had little impact on the economy, and the dollar fell against every major currency. While American stocks did well, foreign markets did better, because the rest of the world grew faster than expected, and inflation remained quiet. Given up for dead, even Japan bounced back. The nationalist right underachieved, and recovery spread to Europe and beyond. Three- quarters of the globe saw an acceleration in growth for the first time in a decade.
The forecasting misses of 2017 reflect mistakes humans have been making since we started thinking about the future. Every forecaster knows that economies rise and fall constantly, oscillating around a long-term trend line. Yet forecasts typically extrapolate current trends on a straight line, so the vision of tomorrow closely resembles today, often implausibly so. A year ago, forecasters thought 2017 would look like 2016; instead the world economy had its best year since the financial crisis of 2008.
The weakness of straight-line forecasts explains why the consensus of leading economists has consistently missed big turns. They have not predicted a single United States recession since the Federal Reserve began keeping such records a half- century ago, and missed many revivals, including the broad global expansion of 2017.
Few dare predict big shifts, so they tinker at the margins. And once an economy gets labeled “miraculous” or “hopeless,” the stereotype sticks. Japan had gone cold for so long few experts could imagine it warming up in 2017, but it did. After long slumps, “Old Man Europe,” Russia and Brazil also recovered much faster than expected. In part, these economies were just rebounding toward their longterm average or, as economists say, “reverting to the mean.”
Economic stereotypes are reinforced by political biases, like Europe’s ingrained fear of extreme nationalism. In early 2017, forecasters took rising poll numbers for nationalists, extrapolated them into the future and imagined for- merly fringe right-wingers gaining influence and setting off a eurozone crisis. Instead, the center held, and sheer relief helped propel the surprise economic recovery.
Forecasters are prone to focus on a single story line, particularly one as compelling as angry populism. The consensus view figured Mr. Trump’s tax and spending plans would increase growth in the United States, while his protectionist threats would undercut the rest of the world. Most forecasters share the establishment disdain for Mr. Trump, yet few paused to consider whether a leader they see as inept and divisive could deliver all this as fast as he promised.
He didn’t, and the widely hyped “Trump Bump” barely surfaced in 2017. Yes, the United States economy grew around 2 percent and generated jobs at a healthy pace. But both trends date to well before Mr. Trump. Liberals who thought Mr. Trump would induce a global recession proved even farther off the mark.
If one were to avoid the straightline projections, political biases and single factors that so often distort forecasts, what would a 2018 forecast look like? Not like the consensus, which is euphoric over the current combo of high growth and low inflation. Usually staid Wall Street economists are giving their 2018 forecasts headlines like “Boom Shaka-laka-laka” and “As Good as It Gets.” Inspired by a cocksure consensus, investors are holding less money in cash than they ever have before — meaning they are all-in on risky investments.
Confidence this solid is a warning sign of complacency. For one, gross domestic product growth is at the top end of the range that has prevailed over the past decade, so it is more likely to slip than accelerate. That should be sobering for every major power, including Trump’s America. But, please, it’s not all about him. For better or worse, Mr. Trump had less impact on the global economy than most experts expected in 2017. The lesson — the inevitable rarely happens, the unexpected often does — applies as well to forecasting 2018.