CAMBRIDGE – Just how bad is the outlook for the United States’ economy? Unfortunately, you cannot tell from the forecasts.
These days, it is common to read forecasts predicting that the US economy will grow at a 3% annual rate in the coming year. But just what does that mean?
The forecaster is not saying that he or she is confident that growth will be exactly 3%. Every forecaster recognizes that the actual growth rate may be higher or lower than the number that he states. There is a distribution of possible growth rates, and the forecaster is telling us just one of the outcomes that he can contemplate.
But if a forecaster tells us that he “expects” a growth rate of 3%, does that mean that he thinks that it is as likely to be above 3% as it is to be below 3% – the “median,” as he sees it, of the distribution of possible growth rates? Or could it mean that the he thinks the most likely growth rate will be close to 3% (the “modal” value), even though he may believe that it is much more likely to be less than that value than to be greater?