MACROECONOMIC FORECASTS OF THE ECONOMY

Good economic forecasts are of the significant value to investors. Since the economy and the market are closely related,good forecast of the macroeconomic variables would be very useful. How good are such forecasts, which are widely available?

According to McNees, macroeconomic forecasts have been more accurate in recent years than in 1960s. However, this tendency toward improvement not continue, and in any case, there is much room for improvement . Although the well known forecasts tend to outperform statistical rules of thumb for macro variables, the margin of superiority is small.

McNees concludes that the forecasts of the prominent forecasts are very similar and that differences in accuracy are very small, suggesting that investors can use any of a number of such forecasts. Obviously not all forecasters are equally accurate. The only good news is that forecast accuracy has increased.As an illustration of the difficulty in forecasting economic activity, consider monetary activity. Because of its vital role in the economy, monetary policy was traditionally assumed to have an important effect on the economy, stock prices, and interest rate.

Recent research by Friedman and Kuttner challenges the usefulness of money as an economic indicator. They find that money lost the ability to forecast economic activity after 1970s. It is reasonable to argue that deregulation of the financial economy, along with financial innovation, created considerable havoc on the relationship between measures of money and the economy (as well as interest rate).Based on evidence, one would conclude that money is not useful tool for policy makers to use when making decisions about future economic activity.
Regardless of whether money's role in forecasting has been impaired, most investors should keep an eye on the actions of the Federal Reserve because of its role in monetary policy and its impact on interest rates.