macro

How Good Were 2025 Forecasts?

James BaileyLeave a comment

Last January I shared a roundup of forecasts for the year from markets and professional economists. Were they any good? Here was their prediction for the US economy:

WSJ’s survey of economists reports that inflation expectations for 2025 were around 2% before the election, but are closer to 3% now. Their economists expect GDP growth slowing to 2%, unemployment ticking up slightly but staying in the low 4% range, with no recession. The basic message that 2025 will be a typical year for the US macroeconomy, but with inflation being slightly elevated, perhaps due to tariffs.

The verdicts (based on current data, which isn’t yet final for all of 2025):

Inflation: Nailed it exactly (2.7%)

GDP: We’re still waiting on Q4, but 2025 as a whole is on track to be a bit above the 2.0% forecast.

Unemployment: 4.6% as of November 2025, a bit above the 4.3% forecast

Recession: Didn’t happen, making the 22% chance forecast look fine

So the professional forecasters were probably a bit low on GDP and unemployment, but overall I’d say they had a good year. What about prediction markets?

For those who hope for DOGE to eliminate trillions in waste, or those who fear brutal austerity, the message from markets is that the huge deficits will continue, with the federal debt likely climbing to over $38 trillion by the end of the year. This is one reason markets see a 40% chance that the US credit rating gets downgraded this year.

While the US has only a 22% chance of a recession, China is currently at 48%, Britain at 80%, and Germany at 91%. The Fed probably cuts rates twice to around 4.0%.

Deficits: Nailed it, the federal debt is currently around $38.4 trillion.

US Credit Downgrade: It’s hard to score a prediction of a 40% chance of a binary event happening, but in any case Moodys downgraded the US’ credit rating in May, so that all three major agencies now rate it as not perfect.

The Fed: Cut rates a bit more than expected.

Foreign Recessions: China and Britain avoided recessions. Germany had a recession by the technical definition of Kalshi’s market, but not really in practice (FRED shows -0.2% Real GDP growth in Q2 followed by 0.00000% growth in Q3). Britain avoiding recession when markets showed an 80% chance was the biggest miss among the forecasts I highlighted.

Overall though, I’d say forecasters did fairly well in predicting how 2025 turned out, in spite of curveballs like the April tariff shock.

If you think the forecasters are no good and you can do better, you have more options than ever. Prediction markets are getting more questions and more liquidity if you’re up for putting your money where your mouth is; if you don’t want to put your own money at risk, there are forecasting contests with prizes for predicting 2026.

Easy FRED Stata Data

Zachary Bartsch1 Comment

Lot’s of economists use FRED – that’s Federal Reserve Economic Data for the uninitiated. It’s super easy to use for basic queries, data transformations, graphs, and even maps. Downloading a single data series or even the same series for multiple geographic locations is also easy. But downloading distinct data series can be a hassle.

I’ve written previously about how the Excel add-on makes getting data more convenient. One of the problems with the Excel add-on is that locating the appropriate series can be difficult – I recommend using the FRED website to query data and then use the Excel add-on to obtain it. One major flaw is how the data is formatted in excel. A separate column of dates is downloaded for each series and the same dates aren’t aligned with one another. Further, re-downloading the data with small changes is almost impossible.

Only recently have I realized that there is an alternative that is better still! Stata has access to the FRED API and can import data sets directly in to its memory. There are no redundant date variables and the observations are all aligned by date.

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Aggregate Demand Regimes

Zachary BartschLeave a comment

Is inflation correlated with output growth?

Consider the AD-AS model which is often expressed in growth rates. Economists will often say that the short-run supply curve is flatter in the short-run and vertical in the long-run. In other words, aggregate demand policy can have SR output effects, and only has LR price effects.  Sounds good.

But there is a lot of baggage hiding behind “can have effects”. Often we’ll say that lackadaisical businesses cause a flatter SRS and that businesses with rational expectations have a vertical one. Also sounds good.

What causes the steepness of the SR supply curve? I’m sure that there are multiple determinants in regard to expectations. Here’s what got me on this topic. David Andolfatto shared the below graph and asked “Does lowflation necessarily mean low growth?”.

Good question. My answer includes expectations concerning the monetary policy regime. Specifically, my answer was “It does in a regime of volatile and uncertain nominal income. Surprise AD growth pushes us up the SRAS.” Andolfatto called me out and in the right way, asking “What’s the evidences for this?”

[…crickets…]

I had no evidence. I had the AS-AD model in hand and some logic – but no evidence. My logic is as follows. In a monetary regime that includes a constant rate of AD growth, output and price growth are inversely correlated. If NGDP grows at 5% always, then inflation falls when output growth rises. In other words, AD is exactly what people expect – illustrated as a vertical SRAS curve.

However, expectations are different in a regime of erratic AD. Let’s say that the rate of AD growth is unknown, but that the variance is known. If this is the world that you live in, then you make hay when the sun shines. Businesses sell more in periods of higher income. And, because they’re marching up the marginal cost curve, prices also rise. Alternatively, it may be that output growth is inflexible and prices rise as a goods are rationed.

Regardless of the truth, the above explanation is just story-telling. I had no evidence. What would the evidence even be? Here’s what I settled on. First, let’s express the AS-AD model in quarterly growth rates. In order to get a handle on monetary regime AD variance, I calculated the standard deviation of the NGDP growth rate by Fed Chair. Presumably, the Fed chair has a decent amount to do with monetary policy and the rear that occupies that chair is an indicator of when a regime begins and ends. I calculated the correlation between the GDP deflator and RGDP growth rates by regime. Below is the scatter plot.

What does it tell us? It tells us that regimes of stable AD growth experience a negative correlation between inflation and output growth. It also tells us that a AD growth volatility is associated with a positive correlation between inflation and output growth. So,  Does lowflation necessarily mean low growth? It does in a regime of volatile and uncertain nominal income.

(Of course this is all casual. It makes sense to me at first blush though. Having said that, the line of best fit also looks like it’s driven by the 2 extremely variable times: McCabe & Powell.)