1. Painless Economic Forecasting for a Small Center
AUBER October 2016
Michael J. Hicks, Ph.D.
George & Frances Ball Distinguished Professor

3. Our Approach . . . Forecasting Roundtable w/ Naïve Econometric Model
ECM-X with FairModel inputs

4. Roundtable & Naïve Model
Group Forecast Comprised of selected local business leaders (closest wins Golden Dart)
ARIMA (p,d,q), single equation models of GDP, Unemployment Rate, Prime Rate and Inflation.

5. Naïve Model

6. Excerpt of Individual Forecasts for Golden Dart
First name
GDP
Inflation
Unempl. Rate
10-yr T-bond J
2.8
1.9
7.8
2.5 S 2
8.1 M
1.8
8.2
1.6
2.1
7.6
2.4
7.5 R
2.2 ⁞ T
1.7 3
9.1
1.68 -2 4 10 L 7
8.3
1.5
2.3
8.4 B
-0.4
7.9

7. ECM-X Model
Quarterly data, with Exogenous variables derived from FAIRModel
Vector Error Correction Model of State and Regional Economies

8. FAIR Model Best known, free forecast, Ray Fair, with Cowles Commission
Zipped Eviews or matlab based program
Quarterly updates with clear evaluation
Produces many forecasted variables for use in subtational variables

9. What is an ECM? Multi-equation model with n-lags
Equilibrium conditions estimated by cointegrating equation for typically non-stationary time series
Use of exogenous variables to aid forecast performance but Information criterion motivates specification

11. Pre-Recession Forecast Performance
Table 6 ECM vs. State Budget Agency 2007:1 to 2008:2
ECM
SBA
GDP
Actual
Forecast
MAD
2007:Q1
0.24%
13,613.40
0.76%
2007:Q2
0.15%
13,769.10
0.23%
2007:Q3
0.06%
13,943.00
-0.05%
2007:Q4
0.30%
14,126.50
0.68%
2008:Q1
1.01%
14,314.30
1.16%
Average Error
0.62%
0.75%
Personal Income
11,451,855
11,382,780
-0.60%
11,244.70
-1.81%
11,568,700
11,543,620
-0.22%
11,380.20
-1.63%
11,722,750
11,712,370
-0.09%
11,542.00
-1.54%
11,867,043
11,854,420
-0.11%
11,696.70
-1.44%
12,002,122
12,011,010
0.07%
11,862.30
-1.16%
-0.16%
-1.26%
Hicks, Michael. "Forecasting State Level Economic Activity: An Error Correction Model with Exogenous National Structural Forecast Components." In Proceedings. Annual Conference on Taxation and Minutes of the Annual Meeting of the National Tax Association, vol. 101, pp National Tax Association, 2008.

12. Personal Income Growth
Post-Recession Forecast Performance
Personal Income Growth
Unemployment Rate
Forecasted
Actual
2011
1.4%
1.2%
2012
1.2%*
3.7%
8.3
2013
2.4%
2.2%
7.8
7.5
2014
2.1%*
-0.4%
7.2
5.9
2015
3.3%
1.8%
5.7
4.8
2016
2.1%
1.6%
* denotes long term forecast results

14. Forecast Components BAD TOP-HAM
Topline Variables: income and employment, maybe GDP and interest rates
Other Forecasts: international groups, banks, universities
Pictures: one or two graphics with combined interpretations
Anecdote: what the forecast might actually look like on the ground
Meaning: what are the practical differences between this forecast and history
Humility: all forecasts are wrong, why might this one be useful
BAD
Baseline drop-off: Lucasian constant-adjustment
Absence of Internal consistency: cointegrating equation matters
Don’t know what forecast means: components of forecsast, equilibrium vs. demand

16. Lessons Learned
Forecasting roundtable great tool for anecdote and averaging producer sentiment.
Golden Dart a nice community interaction
ECM model flexible, rapid, low cost method of predicting economic activity (if you studied time series econometrics in grad school)
Commercial/free models of national economy are good platform