People make decisions based on information. A quarterback scanning receivers or a corporate executive concluding a merger must usually make decisions with inadequate information. With hindsight, they often could have made a better choice. A similar problem holds true for economics: Initial economic statistics are often inaccurate and may be subsequently revised as better data become available. One consequence of this process of initial data releases that are later revised is that economists now realize that the quality of economic forecasts needs to be judged against the data available at the time. A second consequence is that when economists make forecasts, they should be aware that the statistics will be revised and incorporate this information into their forecasts.
The U.S. personal saving rate, which has been averaging less than 1 percent of after-tax personal income for the past three years, has often been initially low and then substantially revised upward. I will take this statistic as an example and discuss how modern economic statistical techniques can improve forecasting, by taking into account the difficulties of measuring saving in the short run.
This article appeared in the Fourth Quarter 2008 edition of Business Review.
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