Transcript Using qualitative business cycle forecasting in MBA

Terry Long
Marymount University
Gulf Coast Economics Conference
October 2011
MBA Macroeconomics
 Premise
 Effective business decisions require knowledge about
the future course of economic activity
 Knowledge about future course of economic activity
requires theoretical framework to interpret and evaluate
economic information
 Framework
 Circular Flow diagram
MBA Macroeconomics
 Theoretical Framework
 SR theory of determination of GDP, employment and
interest rate in open economy
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Product sector (C+I+G+NX = Y)
Financial sector (Md = Ms)
Global sector (D$ = S$)
General equilibrium
 Outcome
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Ability to interpret and evaluate current economic
information using a relatively simple theoretical model
Ability to evaluate professional forecasts
Qualitative Business Cycle Forecast
 Combining empirical information and a theoretical model
to predict the direction and sustainability of a change in
real GDP and employment (critical thinking skills)
 Combine SR product sector partial equilibrium (GDP =
C+I+G+NX = Y) with current economic data to assess current
status of business
 Combine SR product sector partial equilibrium with current
economic indicator indices to foresee potential shocks
 Combine partial equilibrium theory of the financial sector
with current interest rate and money supply data and FOMC
reports to foresee potential shocks
Qualitative Business Cycle Forecast
 Combine partial equilibrium theory of exchange rate
determination with Balance of Payments
(international transactions) and exchange rates data to
foresee potential shocks
 Using three sector general equilibrium theoretical
model, current economic information and critical
thinking, construct near term forecast for the direction
and sustainability of GDP, employment and price level
changes
Sample Assignment
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Your boss just recently read an opinion piece in the Financial Times (6/7/10) by Mort
Zuckerman, Editor in Chief of US News and World Report in which he states ”This is an
unnervingly jobless recovery.” On June 14th, your boss read another opinion piece by
Robert Samuelson (Washington Post) in which he references a “double dip recession”.
Since your boss knows you are currently taking an MBA macroeconomic course,
he/she asks you if the economy is likely to have a jobless recovery or a double dip
recession. Knowing your boss has not completed a graduate course in macroeconomics
you will need to provide your boss a succinct but methodical rationale of your assessment
of the validity of these comments.
To assess these predicted macroeconomic outcomes, you will need to construct your
own short run forecast for the direction of GDP, employment and interest rates and
explain it to your boss. To do this you will need to
identify and articulate the theoretical model and empirical information you will use,
analyze the impact of your selected empirical information in the context of the model
assess the outcomes including the risks to your forecast.
and conclude with an evaluation of the two comments informed by your analysis.
To demonstrate the thoroughness of your analysis your sources should include a
minimum of six professional/academic articles and several data sets. These sources
should be cited in the narrative where relevant.
Assessment of Individual Learning
 As course assignment, individual student forecast
assessed on demonstrated level of critical thinking
 Level I – Uses the theoretical constructs to
systematically evaluate current economic activity and
support basis for forecast of likely future path of the
economy
 Level II – Compares several existing forecasts, describes
basis for those forecasts and constructs “consensus”
forecast
 Level III – Forecasts most recent economic activity
forward
How accurate were students’
forecasts?
 For each near term period compare a majority student
forecast and a minority student forecast with actual BEA
and NBER data, and a “professional” panel forecast
published by the National Association for Business
Economics (NABE Outlook).
 Seven sets of student forecasts from
 Fall 2007
 Summer 2008
 Fall 2008
 Spring 2009
 Summer 2009
 Fall 2009
 Summer 2010
Most Interesting Results
 Fall 2007
 16% of students predicted a contraction beginning early
2008
 NBER dates cycle peak at December 2007
 Both majority (58%) student forecast and NABE Panel
predicted slow growth in GDP
 NABE said no recession
Most Interesting Results
 Summer 2008
 20% of students predicted an on-going contraction
 NABE Panel forecast did not predict decrease in real
GDP until November 2008
 Fall 2008
 24% of students predicted the trough for 3rd or 4th Q of
2009
 NABE Panel (75%) predicted trough end after 2nd Q
2009
 NBER dates trough at 6/09
Most Interesting Results
 Slow growth recovery (Summer and Fall ‘09 and
Summer 2010)
 Percent of students predicting a U fell from 100% in Su
‘09 to 58% in F ‘09 to 42% in Su ’10
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In Su ‘10 57% of students predicted a double-dip recession
(W) and 100% continued jobless
 NABE Panel consistently predicted growth
 May 2010 NABE Panel predicted “above trend” growth in GDP
and “robust” increase in employment and then revised down
in October of 2010
 BEA data show small positive growth in GDP beginning
in 3rdQ 2009
General Observations
 Overall student forecasts as accurate (or inaccurate) as
NABE Panel forecasts
 Effective learning tool
 Qualitative forecasts by students more pessimistic than
quantitative forecasts by NABE Panel
 Illustrate difference between critical-thinking and statistics
driven forecasting?
 “Inaccurate forecasts by independent and government economists that the
recession and subsequent recovery would be “V-shaped” and the country
would emerge from the economic doldrums more quickly was a big factor
in failed recovery efforts, Peter Orszag, former director of the White
House’s office of management and budget, said.”
 Financial Times article “Adviser weighs in on jobs act for US” by Johanna Kassel,
10/14/11.
Preview of the Future
 Summer 2011
 Slow growth recovery predicted by 90% of
students and continued jobless recovery
predicted by 77% of students
 NABE Panel revised downward projection
for economic growth and gradual
improvement in labor market