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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 Tbills • Interest rate: 10-year Tnotes • 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: f t t t Y Y • Test: α = 0, β = 1 Evaluating the Survey Forecasts • Unbiasedness – Or: Yt Yt t • Test: α = 0 f 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