The False Promises Of Economic Forecasting (Newly Exposed By The ‘Tariff Whiplash')

The article asserts that professional economic forecasts, particularly recession probabilities, are demonstrably unreliable and volatile, as evidenced by the rapid and contradictory shifts in outlook from major institutions like JP Morgan and Goldman Sachs during the 2025 'tariff shock' episode. These forecasts consistently exhibit poor accuracy, often acting as lagging indicators by reacting to economic events already in motion rather than predicting crucial turning points, thereby diminishing their utility for investors and policymakers.

Analysis

The reliability of professional macroeconomic forecasting is fundamentally challenged by recent events, particularly the 'whiplash' in sentiment during the 2025 'tariff shock'. Major financial institutions demonstrated extreme forecast volatility, with JP Morgan's recession probability swinging from 20% in January to 60% in April, before being retracted in July. Similarly, Goldman Sachs adjusted its odds from 15% to 65% and then down to 30%. The analysis posits that these forecasts are not only volatile—with professional sentiment shown to be four times more volatile than the Michigan Consumer Sentiment index—but also critically inaccurate, frequently acting as lagging indicators. Evidence cited includes the NY Fed's model, which incorrectly signaled a greater than 70% recession probability in May 2024, and the Philadelphia Fed's 'Anxious Index', which issued a false alarm at its highest level since 2008. The core issue identified is a 'direction of causality' problem, where forecasts appear to 'postdict' by reacting to past economic data, such as the previous quarter's GDP, rather than predict future turning points. This lagging nature renders them ineffective for investors, as stock markets typically price in downturns before economists officially declare them. The ultimate vindication of this critique was the strong underlying economic data, with Q2 2025 U.S. GDP growing at 3%, significantly beating the pessimistic consensus.

Key Decisions for Investors

• Investors should significantly discount top-down macroeconomic forecasts, particularly recession probabilities from major financial firms, as they have proven to be highly volatile, historically inaccurate, and lagging indicators.
• Prioritize analysis of high-frequency economic data and corporate-level fundamentals, such as retail sales and earnings reports, which proved more resilient and predictive than the alarmist consensus during the recent 'tariff shock' episode.
• Avoid using sharp swings in economist sentiment for market timing, as the analysis indicates these forecasts follow market movements and past GDP data rather than lead them, offering little to no predictive value for asset allocation.
• Re-evaluate the weight given to economic research from institutions like JP Morgan (JPM) and Goldman Sachs (GS) whose forecasting models are shown to be flawed, recognizing that market price action itself is often a more timely leading indicator than the lagging 'expert consensus'.