In this report, the Congressional Budget Office assesses its two-year and five-year economic forecasts and compares them with forecasts of the Administration and the Blue Chip consensus, an average of about 50 private-sector forecasts.
Variables Examined. CBO examines its forecasts of output growth, the unemployment rate, inflation, interest rates, and wages and salaries.
Measures of Quality. CBO focuses on four measures of forecast quality—average error, average absolute error, root mean square error, and two-thirds spread of errors—that help the agency identify the centeredness (that is, the opposite of statistical bias), accuracy, and dispersion of its forecast errors.
The Quality of CBO’s Forecasts. Most of CBO’s forecasts of output growth, unemployment, and inflation have average errors close to zero, but CBO’s estimates of interest rates and wage growth have been too high on average. As measured by the root mean square error and the average absolute error, the two-year forecasts are not, on the whole, more accurate than the five-year ones.
Comparison With Other Forecasts. The degree of centeredness varies by forecaster and variable. For example, CBO and the Blue Chip consensus tend to produce more-centered forecasts of output growth but less-centered forecasts of interest rates than the Administration does. CBO’s forecasts tend to be more accurate than the Administration’s estimates and, for most variables, have the same or smaller two-thirds spreads. For all four quality measures, CBO’s forecasts are roughly comparable to those of the Blue Chip consensus.
Sources of Forecast Errors. All forecasters failed to anticipate certain key economic developments, resulting in significant forecast errors. The main sources of those errors are turning points in the business cycle, changes in labor productivity trends and crude oil prices, the downward trend in interest rates, the decline in labor income as a share of gross domestic product, data revisions, and the coronavirus pandemic.
Forecast Uncertainty. In this report, CBO uses past forecast errors to gauge the uncertainty of its current forecasts. For example, using the root mean square error, the agency estimates that there is an approximately two-thirds chance that economic growth will average between 0.6 percent and 3.1 percent over the next five years. CBO’s central estimate in February 2023 was 1.9 percent.