Thursday, September 8, 2016

Uncertainty And Standard Deviations Of CBO's Forecasts Of Real GDP And Inflation

From Congressional Budget Office, "Uncertainties in the Economic Outlook" Posted by Charles Whalen, analyst in CBO’s Macroeconomic Analysis Division, on September 7, 2016:
On August 23, CBO published An Update to the Budget and Economic Outlook: 2016 to 2026, describing the agency’s projections for the federal budget and the U.S. economy over the next 10 years. As is always the case, economic outcomes will undoubtedly differ from CBO’s projections in some respects. Today, we discuss several uncertainties in the current economic outlook.

Recognizing the uncertainty of economic forecasts, CBO constructs its projections so that they fall in the middle of the distribution of possible outcomes, given current law and the economic data available when the projections are prepared. Nevertheless, many developments—such as economic growth abroad that was weaker than expected or growth in productivity that was faster than expected—could make outcomes differ substantially from what CBO has projected.
To roughly quantify the degree of uncertainty in its projections for the next five years, CBO analyzed its past forecast errors for the growth rate of real GDP over five-year periods since 1976. Those errors have a standard deviation of about 1.3 percentage points: Thus, in CBO’s view, there is a two-thirds chance that the average annual growth rate of real GDP over the next five years will be between 0.7 percent and 3.2 percent (see the figure). Similarly, CBO’s forecast errors for inflation over five-year periods (as measured by the consumer price index for all urban consumers, which is generally higher than the PCE price index by about 0.4 percentage points per year owing to the different methods used to calculate them) have a standard deviation of 1.5 percentage points, which suggests that there is a two-thirds chance that inflation will average between 0.6 percent and 3.6 percent over the next five years.

Source: Congressional Budget Office

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