Forecasting in the 90s: it's not like it used to be.

• Author: Siegel, Michael
• Position: Evaluation of historical forecasting model

Forecasting in the

90s: It's Not Like It

Used To Be

Most state and many local governments rely on forecasting models for establishing their annual budgets. These models rely on techniques which establish statistical relationships between "independent" and "dependent" variables, relationships obtained through regression or other time-series techniques which link economic and demographic changes with their fiscal outcomes on the basis of historic data. Most other forecasting techniques, including incremental, average cost, moving average and per capita approaches all share some degree of reliance on historic data.

Forecasting techniques which rely on historic data will maintain their accuracy to the degree that historic relationships remain valid over the forecast period. While such models can be powerful forecasting tools, even under "normal" economic circumstances they require annual or semi-annual updating and review to maintain the accuracy of the relationships.

Failure of historically based models to yield an accurate or reliable forecast can be attributed to either one or both of the following: the inputs (often referred to as "drivers") were wrong, or there was a fundamental change in the relationship between certain, drivers and their dependent variables (often referred to as outputs, or in this case, the forecast).

Given the widespread budget shortfalls which are being experienced by both state and local governments throughout the U.S., it is reasonable to conclude that forecasting models in some jurisdictions have not yielded accurate results. Indeed, the list of jurisdictions experiencing budget shortfalls includes many state and local governments which have devoted substantial resources to their forecasting efforts.

Some of these shortfalls may not have been the result of the models, but may have been caused by politicians and legislators failing to heed their results. Other forecasts may have yielded overly optimistic results if they relied on national or regional forecasts of economic activity. Most blue-ribbon economists and forecasting firms have been wrong in predicting a "soft-landing" and a quick recovery, followed by a return to prerecession, business-as-usual growth rates along with the attendant consumption, growth, spending and borrowing characteristics. Inaccurate assumptions contributed to unreliable forecasts in 1990 and 1991, but they do not explain everything.

Forecasting models (econometric and otherwise) which...