One of the most closely watched economic measures is US GDP (gross domestic product). Sales forecasters would love to have an early warning variable in their models. Is GDP the missing link for anticipating major economic shifts? Unfortunately, the short answer is probably no. US GDP forecasting is quite inaccurate.
The Federal Reserve Board sponsors a quarterly survey of professional forecasters, called the SPF. The survey is returned to the Fed mid-way through each quarter, and includes forecasts for the current quarter and the next four quarters. As shown in the chart below, the best MASE (mean absolute scaled error) is only 61%, and that is for the current quarter — which was already half-complete when the forecast was submitted!
When forecasting four quarters into the future, MASE jumps to 93%. This means the SPF is only slightly more accurate than the simple projection that GDP growth will not change. In other words, when forecasting one year ahead, the SPF does not add much value. We could say they are hardly better than a “random walk” forecast.
One bit of good news: US GDP forecasting is improving. The forecast error trend channel is narrowing. Why? The SPF has tempered its optimism during economic downturns.
If you would like information on why MASE is the best way to measure forecast error or how to calculate it, then take our Forecasting Fundamentals course.