Jamie Dimon is right: Economic forecasts have been wrong lately, but that's really nothing new

Forecasters are wrong about the economy, but that's not a new thing. They've been wrong for years.

Yesterday, I found it amusing to hear Jamie Dimon, CEO of JPMorgan Chase, was shocked. The economic forecasts by the major Wall Street Banks were "100% dead wrong" over the past 18 months. Dimon called for humility. "I'd be cautious about what could happen next year," Dimon said at the Future Investment Initiative Summit in Riyadh.

He is not the only person who appears surprised.

The New York Times also commented on Monday's poor forecasting performance of economists in a separate article, "New Normal or No Normal?" The New York Times published a story entitled "How Economists Got it Wrong for Three Years" which noted that forecasts of inflation in 2021 being "transitory" and predictions that 2023 will be a recession due to Federal Reserve rate increases have all been wrong.

In the Times article, Torsten Slok, asset manager Apollo Global Management said, "The forecasts were embarrassingly wrong in the entire forecasting communities." We are still trying figure out how the new economy works.

You can hear this subtext: "My prediction would have been correct, if Ccovid hadn't invaded Ukraine!" Or "I would have been correct if Russia had not invaded Ukraine!"

All of it is nonsense. Stock pickers, analysts and strategists, as well as economists, the Federal Reserve, and even stock pickers are not better at predicting the "old economy" compared to the "new economy."

Covid, and the Russian invasion in Ukraine, did affect forecasts. But that's beside point. Wrong predictions are the norm. Wall Street and others are consistently wrong and this has nothing to with Covid.

Why is it that no one can predict the future?

Since ages, it's been a running joke in the academic world: nobody can predict the future well. Nobody.

In my book "Shut up and keep talking: Lessons on life and investing from the floor of the New York Stock Exchange," several chapters are devoted to this mystery: No one, I repeat no one, can predict the future. Amateur stockpickers are terrible but so are professionals.

Analysts and strategists are bad at predicting economic trends and earnings. Economists do a terrible job. Even the Federal Reserve with some of the best economists in the country has a poor track record in predicting short-term trends for inflation and GDP.

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Komal Sri Kumar says the Fed is "totally out-of-control" and doesn't know where to go next.

It's no better in other disciplines. The forecasters are generally terrible.

Philip Tetlock, a University of Pennsylvania Professor, studied in 2005 the predictions of nearly 300 experts from many different fields including politics, economics and social sciences. This included academics and journalists.

His conclusion: "We found few signs that expertise translated into greater ability to either make 'well calibrated' or a 'discriminating forecast'."

How is this even possible? How is it that everyone has such a poor ability to predict the future? Two major issues are at play.

What's wrong about the future?

Forecasters have a number of biases which limit their ability to make accurate predictions.

Forecasters are an example of people who overestimate their abilities to predict the future. A herd mentality is also evident, as they blindly follow what other people predict. Or, they choose information that supports their point of view and ignore information that is contrary. Other biases can also affect the interpretation of data.

Second, the world is so complex that the future is difficult to predict. Unpredictable events can affect the outcome.

Although it is uncomfortable, we don't really know much about the future.

Imagine trying to guess where the stock price will be in a year. Stock analysts are tasked to predict the future earnings of a company and its dividends in a year's time and how this will impact the stock price.

How difficult could it be?

It turns out to be very difficult. Each company has a million variables that can all affect the outcome.

Many factors are unpredictable, while others may be.

The economy could be hit by new shocks and surprises at the macro-level, including inflation, an increase in interest rates or disruptions to critical supplies due to war. A new competitor may be a threat to the company. The company may be acquired or involved in a merger.

This is not to mention a huge outlier, like Covid. It rendered all forecasts ineffective.

When you start to predict the behavior of people, such as CEOs, it becomes even more difficult. Predicting how humans will perform in the future can be just as challenging as predicting stock prices.

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Jim Grant: The Fed can't be held hostage by economic data

Many people experience personal events that can affect their job performance. This includes unexpected health problems that could cause them to become seriously ill, or even retire.

It is difficult to predict the U.S. economic future, even when the forecast is for one year.

The Federal Reserve staff's research team studied the Federal Reserve’s economic forecasts between 1997 and 2008, and found that Fed's predictions of economic activity a year in advance were no better than the average benchmark predictions.

It's easy to see why the Fed misses their inflation forecasts. There were a lot of variables and incorrect assumptions that went into the forecast. The Times article notes that other factors have affected recent economic forecasts, including the Russian invasion in Ukraine; being overly pessimistic about growth prospects; and lack of data on consumer savings.

Bottom line: Blaming Covid or the Russian invasion for poor forecasts is irrelevant. Forecasts are always poor. Even if Covid and the Russian invasion hadn't happened, forecasts would be poor.

It's worth a shot

Do we all have to give up trying to predict the future? No, of course not.

We won't throw in the towel and become nihilists. After watching the Wall Street circus unfold for over 30 years, my estimation of myself and others' forecasting abilities has certainly improved.

Dimon knows that forecasts are about probabilities. "Prepare yourself for the possibilities and probabilities. Do not call one course of action. I have never heard anyone do it," Dimon said at the conference.

If you are wondering "Is there a way to improve forecasting?" you might want to check out Philip Tetlock’s Good Judgment Project. It aims to improve forecasting by teaching people how to be less biased.

New Edition of Stock Trader's Almanac

Although past stock market performance is not an accurate predictor of future returns for many investors, they have known of seasonal trading patterns that have greater than even odds to repeat.

The Stock Trader's Almanac has released its 57th edition in 2024, which is a great guide for those who wish to follow these patterns.