Economic Forecasts in the Age of Big Data
Economists, policymakers, and business leaders need better data on which to base their forecasts. Fortunately, new sources of information about the economy have recently emerged: the vast collections of private data collected by search engines and other Internet companies.
WASHINGTON, DC – In late July, it came to light in the press that the US Federal Reserve had accidentally published economic forecasts for the next five years on its website. The forecasts, which make clear that the Fed does not expect a recession before 2020, revealed worrying problems not just in terms of data security, but also in the methods used by its economists.
Given that periods of economic expansions historically average about 4.8 years, the Fed’s predictions seem like wishful – and perhaps dangerous – thinking. The economic recovery following the 2009 global financial crisis may have been extremely weak; but we would be wise to prepare for another downturn in the next few years.
The disconnect between the Fed’s forecast data – upon which, in theory, it bases its decisions – and the historical trends is not surprising. Attempts by economists to predict the future have had mixed results, at best; very few foresaw the depth of the Great Recession, even after it had already started. The trouble lies in the fact that many of the leading indicators used to measure the economy rely on out-of-date, incomplete, or flawed data.