Tuesday, November 22, 2005

Forecasting uncertainty 

The NABE Outlook, which is a consensus forecast from 45 economists, indicates that GDP will finish the year with an annual growth rate of 3.6% this year and 3.3% next. There will be a short-term uptick in inflation to 3.8% (in the year through the fourth quarter), but 2.3% next year. Core inflation about the same at 2.4% for 2006. Higher oil prices will inflate the trade deficit to $769 billion this year and only subside to $630b next. But the most interesting part of the full report (available only to members) was the range of forecasts for oil prices at end 2006:

<$40 10%
$40-$60 45%
$60-$80 32%
$80-$100 9%
>$100 4%

That indicates that one in four forecasters think there will be a signficant move in oil prices between now and the end of next year, with slightly more thinking we go north of $80 than south of $40. I wonder if there's been another time where we've had that much uncertainty. And with that, I wonder how certain these forecasters are of their estimates. I know at least one weather forecaster who does a good job depicting uncertainty.