Forecast Surveys

Introduction

• Two Philadelphia Fed surveys of private-sector forecasters– Livingston Survey– Survey of Professional Forecasters (SPF)

• Provide timely forecasts for policymakers and economic analysts

• Used to answer numerous research questions

Introduction

• Philadelphia Fed economists pushed to have surveys here– Livingston Survey: Don Mullineaux (?)– SPF: Dean Croushore

• Current research department keeps them here & makes them ever more useful– Loretta Mester (research director)– Tom Stark (maestro)

Introduction

• Both surveys– Available to the public at no charge (Fed’s public

education mission)– Used by news media, policymakers, economic

analysts, labor unions, consumers

Introduction

• Livingston Survey– Begun in 1946– Joe Livingston, journalist– 1970s: economists discover survey– 1978: Philadelphia Fed takes over database– 1990: Philadelphia Fed takes over administration

of survey

Introduction

• SPF– ASA/NBER survey begun in 1968– Victor Zarnowitz & other founders– ASA/NBER folds survey in 1990– Philadelphia Fed takes over in 1990– Renamed Survey of Professional Forecasters

What Variables Do the Participants Forecast?Both surveys:

• Nominal GDP• Real GDP• Inflation (CPI)• Unemployment rate• Industrial production

• Interest rate: 3-month T-bills

• Interest rate: 10-year T-notes

• Corporate profits after tax• Housing starts• Business fixed investment

What Variables Do the Participants Forecast?Livingston survey:

• Producer price index• S&P 500 stock prices• Average weekly earnings• Retail trade sales• Auto sales• Prime interest rate

• Average over the next 10 years:– Real GDP growth– CPI inflation rate

What Variables Do the Participants Forecast?SPF:

• GDP price index• Payroll employment• Interest rate: AAA bonds• Remaining GDP

components• Inflation rates:

– CPI excluding food & energy prices (core CPI)

– PCE price index– PCE price index excluding

food & energy prices (core)

• Probability that real GDP will decline

• Distribution forecasts:– Real GDP– GDP price index– Core CPI– Core PCE price index

• Long-term forecasts:– CPI price index– PCE price index

What Variables Do the Participants Forecast?SPF:

• First Quarter:– Long-term projections

• Real GDP growth• Productivity growth• Stock returns• Long-term bond returns• Short-term bond returns

• Third Quarter:– Estimates of natural rate

of unemployment

• Special Questions– Declines in house prices– Effects of stimulus

package– Effect of Y2K

Anonymity

• Both surveys promise anonymity– Can’t match forecaster to a forecast– Allows forecasters to reveal their true forecast,

without attribution– Prevents herding and extreme forecasts

Evaluating the Survey Forecasts

• Are the forecasts accurate?• Statistical tests– Unbiasedness (forecast errors have zero mean)– Efficiency (forecast errors are uncorrelated with

information known when forecast was made)

Evaluating the Survey Forecasts

• Unbiasedness– Over long samples, forecasts of major variables

appear unbiased (Figure 1)

Evaluating the Survey Forecasts

• Unbiasedness– Over long samples, forecasts of major variables

appear unbiased (Figure 1)– Formal statistical tests:

• Test: α = 0, β = 1

tftt YY

Evaluating the Survey Forecasts

• Unbiasedness

– Or:

• Test: α = 0

tftt YY

Evaluating the Survey Forecasts

• Sub-periods show poor performance

Evaluating the Survey Forecasts

• Sub-periods show poor performance• Persistent forecast errors in 1970s and 1990s• Those periods require explanation: failure to

recognize impact of faster money growth; errors in evaluating natural rate of unemployment and rate of potential GDP growth

Evaluating the Survey Forecasts

• Inefficiency with respect to other variables• Test: forecast errors should be uncorrelated

with other variables known when survey was conducted– Example from Ball-Croushore (Figure 3)

Evaluating the Survey Forecasts

• Inefficiency with respect to other variables– Example from Ball-Croushore (Figure 3)– SPF forecasters seem not to change output

forecasts enough in response to change in monetary policy

Evaluating the Survey Forecasts

• Accuracy of probability distribution forecasts– Results from Diebold-Tay-Wallis (1999)• Forecasts are reasonably accurate• But too much probability of a large reduction in

inflation• Persistent inflation forecast errors

Evaluating the Survey Forecasts

• Conclusion– SPF & Livingston survey forecasts fairly accurate—

passing most tests– Some imperfections