CBO's Economic Forecasting Record: 2015 Update

For nearly four decades, the Congressional Budget Office has prepared economic forecasts that underlie the agency’s projections for the federal budget and cost estimates for proposed federal legislation. In particular, forecasts of output, inflation, interest rates, and income play a significant role in the agency’s budgetary analysis; for example, projections of wages and salaries are used to forecast individual income tax receipts.

CBO regularly evaluates the quality of its economic forecasts by comparing them with the economy’s actual performance and with forecasts by the Administration (as published in the annual budget documents prepared by the Office of Management and Budget) and the Blue Chip consensus—an average of about 50 private-sector forecasts. Such comparisons may indicate the extent to which imperfect information and analysis might have caused CBO to “miss” patterns or turning points in the economy. They also may identify areas where CBO has tended to make larger errors than other analysts.

This report evaluates CBO’s macroeconomic forecasts over two-year and five-year horizons. The periods used for the evaluations differ by variable and by forecast horizon, depending on the availability of the needed data.

How Does CBO’s Forecasting Record Compare With Those of the Administration and the Blue Chip Consensus?

CBO’s forecasts generally have been comparable in quality with those of the Administration and the Blue Chip consensus. When CBO’s projections have proved inaccurate by large margins, the errors have tended to reflect difficulties shared by other forecasters.

Do CBO’s Forecasts Exhibit Notable Bias?

A simple and widely used indicator of statistical bias is the mean error—the average tendency of a forecast to be low or high over an entire period. In general, CBO’s forecasts and those by the Administration and the Blue Chip consensus have had similar mean errors. Specifically, an evaluation of CBO’s mean errors reaches two conclusions:

• For CBO’s forecasts that look two years ahead, the mean errors since the early 1980s have generally been very small. The agency’s forecasts have shown slight tendencies to overestimate future interest rates and wages and salaries.
• For CBO’s forecasts that look five years ahead, the mean errors since the early 1980s imply a slightly stronger tendency to overestimate inflation compared with that of the agency’s two-year forecasts. That tendency accounts for about half of the higher mean errors for growth in nominal output and in wages and salaries.

How Accurate Are CBO’s Forecasts?

Accuracy is the degree to which forecast values are dispersed around actual outcomes. One widely used measure of accuracy is the root mean square error. By that measure, the forecasts by CBO, the Administration, and the Blue Chip consensus have been about equally accurate over two-year periods as well as over five-year periods. Specifically, an evaluation of CBO’s root mean square errors reaches two conclusions:

• Among two-year forecasts by CBO since the early 1980s, forecast values deviated from actual outcomes by 1.4 percentage points per year for real (inflation-adjusted) output growth and by 0.8 percentage points per year for inflation in the consumer price index.
• Among five-year forecasts by CBO since the early 1980s, forecast values deviated from actual outcomes by 1.2 percentage points per year for real output growth and by 0.6 percentage points per year for inflation in the consumer price index.

What Are Some Sources of Forecasting Errors?

Sources of large forecasting errors have included the difficulty of predicting the following:

• Turning points in the business cycle—the beginning and end of recessions,
• Changes in trends in productivity, and
• Changes in crude oil prices.

In addition, revisions to the historical data (on output and income, for example) that forecasters use for economic projections can complicate the task of interpreting forecasting errors. CBO uses current versions of historical data to compute the forecasting errors and statistics. Had the revised data been available to forecasters, rather than the original information that was available when the forecasts were produced, the forecasts themselves would have been different. Despite that complication, recently published data present a simple and consistent point of comparison for evaluating forecasts by CBO and others.

Do Assumptions About Fiscal Policy Affect Forecasting Errors?

Different assumptions about fiscal policy can account for some of the differences between forecasts, and thus differences in forecasting errors. CBO constructs its economic projections under the assumption that federal fiscal policy will generally follow current law, thereby providing a benchmark for lawmakers as they consider potential changes in the law. In contrast, the Administration’s forecasts reflect the assumption that policies included in the President’s proposed budget will be adopted. Forecasters in the private sector (represented in the Blue Chip consensus) form their own assumptions about the future stance of federal fiscal policy, which may anticipate changes in law.

Different assumptions about fiscal policy can matter particularly when policymakers are considering major changes to current law. For example, in 2009 and 2010, different fiscal policy assumptions caused CBO’s two-year forecasts of real output growth to diverge noticeably from those of the Administration and the Blue Chip consensus.