Government’s crystal ball a bit cloudy on forecasting unemployment rate

Government forecasters have been largely inaccurate in their predictions on the nation’s unemployment rate over the last couple of years.

In March of 2009, the nonpartisan Congressional Budget Office (CBO) estimated that the stimulus law would decrease the unemployment rate to 7.7 percent. The Obama administration, meanwhile, also made incorrect claims.

{mosads}The latest unemployment report, released last week, dropped the rate to 8.6 percent, though it has hovered around 9 percent for much of 2011. One percentage point equals approximately 1.5 million jobs, according to October 2011 data.

The White House Office of Management and Budget (OMB) predicted in its 2010 budget that the unemployment rate would be at 7.9 percent for its annual average that year. The 2010 annual average for the unemployment rate stood at 9.6 percent.

OMB also predicted in its fiscal 2009 mid-session review that the unemployment rate’s annual average for 2012 would be 4.8 percent.

“The president and CBO have seen the world through rose-colored glasses,” said former director of the Office of Economics at the U.S. International Trade Commission Peter Morici. “They’re assuming very high growth rates that are not going to be obtained, and that’s basically how you get unemployment rates that don’t make sense.”

The implications of making inaccurate predictions on the unemployment rate are significant, some contend. CBO lost some credibility, experts say, and future forecasts will not be taken as seriously.

CBO declined to comment for this article.

One effect of inaccurate predictions on the economy is that policymakers believe things are better than they are, making the recession “longer and deeper” than it should have been, economist Justin Wolfers said. 

“[The] forecasts under-predicted the size, the magnitude and the duration of the recession and as a result we have put in place a monetary stimulus that is a [weaker] stimulus than we should have had,” he told The Hill.

Political decisions are made based on what economists see in their crystal balls. In June of 2010, the White House, sensing that the economy was clearly headed in the right direction, launched its “Recovery Summer” initiative. When the economy later soured, administration officials stopped using the phrase and admitted that they were frustrated.

No president since Franklin D. Roosevelt has won reelection with the unemployment rate higher than 7.2 percent.

Former CBO Director Doug Holtz-Eakin said the agency’s predictions of the effects of the stimulus “accelerated the divide in Congress over what we should do to improve the lot of the unemployed.”

“It’s really raised the partisan divide,” Holtz-Eakin said, emphasizing that it would have been almost impossible for CBO to predict today’s number based on 2009 information.

Wolfers emphasized that the CBO was not “proven wrong.”

Forecasting is about probability, he said, noting that one of the agency’s goals is to give a rough estimate — whether that’s about the economy or how much a bill will cost or save the government.

“The people who were proven wrong in 2008 were the people who said there was no chance the U.S. economy could undergo a major deep recession,” he said. 

Economic forecasting, including unemployment rate predictions, is a difficult art in and of itself, Wolfers said. Economic data is imperfect, and Wall Street’s market can change “virtually overnight.”

“The truth is none of us are really good at it,” he told The Hill. “In many empirical sciences, we have huge reams of economic data. The problem with the U.S. economy is that [it has] only existed for a handful of decades and we don’t yet know to any great degree of certainty what the patterns in the data are.”

A review of CBO’s reports show that the agency saw a recession coming, although the scope has become clearer over time.

“The shortfall in the nation’s output relative to its potential is comparable with what occurred during the recession of 1981 and 1982 and will persist for significantly longer — making the current recession the most severe since World War II,” the CBO stated in a March 2009 report.

There are unique aspects from 2008 through now that would affect the ability of CBO to predict the unemployment rate accurately.

“The September 2008 financial crisis was an economic catastrophe,” former CBO director Alice Rivlin said, and was not predicted by any forecaster.

“Forecasters have a lot of trouble with big, unexpected events like that. I mean, they don’t get predicted, basically,” she said.

Morici said CBO might have been hindered in making accurate unemployment predictions because of its attempts to remain neutral.

“They’re unwilling to look at events of a political nature and say what is likely to happen,” Morici told The Hill.

“Most recently, if you look at the multipliers associated with an extension of the payroll tax program, they come up with a really huge range … They’re unwilling to make political judgments so as to narrow that range.”

The office is not as nonpartisan as it likes to claim, he said.

In certain scenarios, CBO does not want “to make the president or the majority look bad.”

“If you’re assuming the economy’s growth rate will be strong, then you’re going to get the jobs, you need to pull down the unemployment rate and those are the kind of projections that you’ve been getting,” Morici claimed.

“For them to make realistic unemployment rate predictions would then be to say that the policies that have been in place don’t work,” he added.

Senate Budget Committee Chairman Kent Conrad (D-N.D.) is defending CBO’s forecasts.

“CBO has a good track record in its economic forecasts. It is important to remember a forecast represents future projections based on conditions and information available at a particular moment in time,” he told The Hill in an email.

“Clearly, many events that impact the economy are impossible to predict.”