Inside the Crystal Ball: How to Make and Use Forecasts

Praise for INSIDE THE CRYSTAL BALL

"An exceptionally clear and comprehensive guide to forecasting. Maury Harris conveys his wealth of experience, knowledge, and judgment in a practical and usable manner for the forecasting practitioner. The book describes the tools, the pitfalls, what to believe, and what to discount. It is an essential read for anyone looking into the future."
David Crowe, Chief Economist, Economics and Housing Policy, National Association of Home Builders

"Consensus forecasts are often wrong, a point well known to most pundits. Maury Harris′ thoughtful analysis often has shown what the majority is missing. This rare and valuable skill stems from a deep understanding of the pitfalls associated with making forecasts. He explains why accuracy is an art, not a science. A wonderful read."
Henry J. Herrmann, CEO and COB, Waddell & Reed Financial, Inc.

"Maury provides two sides to a very important coin. First, forecasters benefit from a simple, user–friendly read on developing forecasts but also being realistic about the pitfalls and degree of accuracy on the forecast. Second, Maury′s work also provides the user of forecasts an interesting and much–needed perspective on the value of forecasts and what forecasts can and cannot deliver. I would recommend Maury′s book."
John E. Silvia, Chief Economist, Wells Fargo; incoming President, the National Association of Business Economists

Acknowledgments

Introduction: What You Need to Know About Forecasting

Chapter 1: What Makes a Successful Forecaster?

Grading Forecasters: How Many Pass?

Why It′s So Difficult to Be Prescient

Bad Forecasters: One–Hit Wonders, Perennial Outliers and Copy Cats

Success Factors:  Why Some Forecasters Excel

Does Experience Make Much of a Difference in Forecasting?

Chapter 2: The Art and Science of Making and Using Forecasts

Judgment Counts More Than Math

Judging and Scoring Forecasts by Statistics

Chapter 3: What Can We Learn from History?

It s Never Normal

Some Key Characteristics of Business Cycles

National versus State Business Cycles: Does a Rising Tide Lift All Boats?

U.S. Monetary Policy and the Great Depression

The Great Inflation is Hard to Forget

The Great Moderation: Why it′s still relevant

Why Was There Reduced Growth Volatility During the Great Moderation?

Forecaster history: Observations from the sidelines before I became a starter.

A History of Professional Forecasters

Forecasting Recessions

Chapter 4:  When Forecasters Get It Wrong

The granddaddy of forecasting debacles: The Great Depression

The Great Recession:  Grandson of the granddaddy

The Great Recession:  Lessons Learned

The productivity miracle and the New Economy

Productivity: Lessons Learned

Y2K: The disaster that wasn′t

The tech crash was not OK

Forecasters at cyclical turning points: How to evaluate them

Forecasting Recessions

Forecasting Recessions: Lessons Learned

Chapter 5:  Can We Believe What Washington DC Tells Us?

Does the U.S. Government Cook the Books on Economic Data Reports?

To What Extent Are Government Forecasts Politically Motivated?

Can You Trust the Government′s Analyses of Its Policies Benefits?

The Beltway s Multiplier Mania

Multiplier Effects:  How Real Are They?

Why Government Statistics Keep Changing Their Mind

Living with Revisions

Chapter 6:  Four Gurus of Economics:  Whom to Follow?

Four Competing Schools of Economic Thought

Minskyites: Should We Keep Listening to Them?

Monetarists: Do They Deserve More Respect?

Supply–Siders: Still A Role To Play?

Keynesians: Are They Just Too Old–Fashioned?

Chapter 7: The New Normal : Time to Curb Your Enthusiasm?

Must Forecasters Restrain Multi–Year U.S. Growth Assumptions?

Supply–Side Forecasting: Labor, Capital and Productivity

Are Demographics Destiny?

Pivotal Productivity Projections

Chapter 8: Animal Spirits: The Intangibles Behind Business Spending

Animal Spirits on Main Street and Wall Street

Can we base forecasts on confidence indexes?

Business Confidence and Inventory Building

How Do Animal Spirits Relate to Job Creation?

Confidence and Capital Spending: Do They Move in Tandem?

Animal Spirits and Capital Spending

Chapter 9: Forecasting Fickle Consumers

Making and Spending Money

How do Americans make their money?

Will we ever start to save more money?

Why Don t Americans Save More?

More wealth = less saving

Do more confident consumers save less and spend more?

Does Income Distribution Make A Difference For Saving & Consumer Spending?

Pent Up Demand & Household Formation

Chapter 10:  What Will It Cost To Live in the Future?

Whose Prices Are You Forecasting?

Humans Cannot Live on Just Core Goods and Services

Key Considerations in Forecasting Inflation

Should We Forecast Inflation by Money Supply or Phillips Curve?

Hitting Professor Phillips s Curve

A statistical lesson from reviewing Phillips curve research

Chapter 11: Interest Rates:  Forecasters Toughest Challenge

Figuring the Fed

Federal Open Mouth Committee

What is the Fed s reaction function ?

Is the Fed often behind the curve ?

Can the Fed talk down interest rates?

Bond Yields:  How Reliable Are Rules of Thumb ?

Professor Bernanke s Expectations–Oriented Explanation of Long–Term Interest Rate Determinants

Supply and Demand Models of Interest Rate Determination

When will OPEC, Japan and China stop buying our bonds?

What will be the legacy of QE for interest rates?

What is the effect of Fed MBS Purchases on Mortgage Rates?

A multiple regression approach to what matters for note and bond yields

Will projected future budget deficits raise interest rates?

Chapter 12:  Forecasting In Troubled Times

Natural Disasters: The economic cons and pros

How to respond to the next terrorist attack

Why Oil Price Shocks Don′t Shock So Much

Market Crashes:  Why Investors Don′t Jump from Buildings Anymore

Contagion Effects: When China Catches Cold, Will the U.S. Sneeze?

Chapter 13: How to Survive and Thrive in Forecasting

Surviving: What to do when wrong

"Hold" or "Fold"?

Thriving:  Ten keys to a successful career

About the Author

Index

MAURY HARRIS is a Managing Director and Chief Economist for the Americas for the UBS investment bank. Dr. Harris has led forecasting teams ranked as the most accurate in the country in four separate years over the past decade. In addition, he has been named numerous times to the Institutional Investor (II) All–America Research Team over the past two decades. Dr. Harris is a past President of the Forecaster′s Club of New York. Prior to the UBS AG acquisition of PaineWebber Incorporated, he was the Chief Economist for PaineWebber. Before that, Dr. Harris worked for the Federal Reserve Bank of New York and The Bank for International Settlements. Dr. Harris holds a PhD in economics from Columbia University, an MA in economics from Columbia University, and a BA in economics from the University of Texas, where he graduated Phi Beta Kappa. He is married with two children.