Joshua Shapiro of MFR leads list of top-ranked economic forecasters
By Michelle Jamrisko,
“I’m a big believer that life is a crapshoot,” Joshua Shapiro says. “There are so many random things that affect your life.”
Shapiro, 54, chief U.S. economist at New York-based forecasting firm Maria Fiorini Ramirez, says his career might have turned out differently if he hadn’t returned home to New York for Thanksgiving during his senior year at Tufts University.
A neighbor of Shapiro’s parents arranged for a winter internship in the money management arm of J. Henry Schroder & Co. in New York, now owned by Tokyo-based Mizuho Financial Group.
Though he was an economics major, until then Shapiro was considering several career paths, including law. The internship piqued his interest enough that upon graduation in 1980, he took a job at the firm as an economic research assistant.
Thirty years later, Shapiro has scored the top spot among forecasters of the U.S. economy for the two-year period that ended Sept. 30, according to data compiled for the annual Bloomberg Markets ranking of global forecasters.
When Shapiro started his career in the early 1980s, the United States was emerging from crisis and suffering from the same symptoms it is now: slow growth and high unemployment. What Shapiro saw two years ago — and other economists didn’t — is that the healing this time would be slower.
He and his firm have been among the more pessimistic forecasters of a U.S. recovery, citing data that show slow growth and relatively high joblessness persisting through 2013. Shapiro predicts the U.S. economy will grow next year by about 1.5 percent.
Shapiro sees monetary policy, with the Federal Reserve benchmark interest rate at almost zero, as having a limited near-term impact on growth. And he considers the $1 trillion U.S. fiscal deficit an important drag on future expansion.
“There is an element of repetitiveness in being an economist these days,” he says, “because adjustments that affect the economy are all very long-term and are not going to change anytime soon.”
Shapiro has absorbed his firm’s reluctance to “get drawn into the ‘rah, rah, rah’ of the moment,” says his boss, Maria Fiorini Ramirez, founder and chief executive of her eponymous firm.
A native of San Giuseppe Vesuviano, Italy, she says she emphasizes the importance of building relationships with an array of economic players, including state and municipal treasurers, in order to gauge risks for clients.
“My guiding principle is protecting principal,” says Ramirez, 63, who worked as a credit analyst and economist at Merrill Lynch before starting her own firm in 1992.
She says her global economic and financial consulting firm serves hundreds of clients, including Fidelity Investments, the Edward Jones brokerage and Japan’s Sumitomo Mitsui Banking.
Shapiro’s downbeat forecast for 2013 is shared by Bruce Kasman, chief economist at JPMorgan Chase, the firm ranked by Bloomberg Markets as the No. 1 global economic forecaster.
“We’re forming a bottom now, and the trajectory of the global economy as we turn into 2013 is going to be modestly higher, but I think the emphasis is on the ‘modest,’ ” says Kasman, who leads a team that produces detailed forecasts for the economies of 38 countries. “We’re getting very limited policy support in terms of monetary easing, and we’re continuing to get significant drag on the fiscal side. In fact, the U.S. drag is intensifying.”
Kasman, 56, learned the practical side of economic forecasting when he worked as a research analyst at the Israeli Finance Ministry after getting an economics degree from the State University of New York at Binghamton. He earned a PhD in economics from Columbia University, then logged seven years at the Federal Reserve Bank of New York and a year at Morgan Stanley. He’s been at JPMorgan for 18 years.
Kasman forecasts 3 percent global growth in 2013. He predicts that the European debt crisis will ease as the European Central Bank’s pledge to buy bonds of distressed euro-area nations proves effective. He says the United States will remain “kind of an island of lackluster growth.”
China could help push up global growth in 2013, Kasman says. He expects that the world’s second-largest economy to rebound but that the need for structural reforms will prevent a replay of the double-digit growth it had boasted for a decade.
“Their competitive position in the world has been shifted by a number of years of pretty tight labor markets,” Kasman says. “I think the government is not inclined to pump things up in a big way, and it has some real problems in terms of managing an overheated credit market and a housing market that is now going down.”
The Bloomberg Markets ranking is based on predictions by almost 400 forecasters covering 11 countries plus the euro zone. The U.S. ranking looks at the work of 71 forecasters during the two years that ended Sept. 30. It measures the accuracy of economic forecasts in 13 categories, including gross domestic product, unemployment, consumer and producer price indexes, home sales, industrial production and personal spending.
The euro- zone ranking measures nine categories, including GDP, inflation, unemployment, consumer sentiment and industrial production.
In the competition for the top forecasting firm, banks and research companies were ranked if they had made predictions for the United States and at least four other countries. JPMorgan’s economics team ranked 13th of the 71 teams that evaluated U.S. economic indicators. It was No. 2 for Brazil, No. 3 for Japan and No. 6 in predicting Canada’s performance.
A bead on the euro zone
The top forecasters for the euro zone were, for the second consecutive year, Andreas Scheuerle and Peter Leonhardt at Frankfurt-based DekaBank Deutsche Girozentrale. For China, the top forecaster was Song Yu of Goldman Sachs. For Canada, it was Avery Shenfeld of the Toronto-based Canadian Imperial Bank of Commerce. And for Japan, it was chief economist Yoshiki Shinke of the Tokyo-based Dai-Ichi Life Research Institute.
Scheuerle, 47, forecasts stagnation for the euro zone in 2013. In November, the euro-area economy slipped into recession for the second time in four years. The 17-nation bloc’s economy shrank 0.1 percent in the third quarter, after contracting 0.2 percent in the second, according to the European Union’s statistics office.
Scheuerle says that in 2013 the focus in Europe is on structural reforms, such as finalizing new euro-zone-wide rules for the banking system. Still, “there’s more hope than expectations,” he says.
“I’m looking very, very closely to Italy,” says Scheuerle, who before joining DekaBank 12 years ago served on the German Council of Economic Experts, a five-member panel also known as the “wise men” that has advised policymakers since 1963. He’s worried that anti-austerity parties will lure a substantial portion of the electorate in Italy’s 2013 elections and undermine delicate agreements among the euro-zone nations to reduce debt and deficits.
“It’s necessary to tell the people that we are on the right path, and therefore it’s very, very important that we see the first green shoots in some of the countries in the next year,” Scheuerle says.
Italian parliamentary elections should take place before the end of April. Germany also is scheduled to hold parliamentary elections in 2013.
Outside the United States, Europe and China, Kasman considers India a potential trouble spot.
“India’s been one that has worried us,” he says, calling it a “wild card” because the government hasn’t supported, and hasn’t been supported by, investment from domestic and international sources. And although recent steps by New Delhi to strengthen the rupee and aid markets are encouraging, the progress is slow.
“We’ve had some reasonably good news recently,” Kasman says, “but it’s very recent and still not well enough established that we’re ready to say it’s all clear here.”
Goldman Sachs’s Song, the No. 1 China forecaster, sees a need for government-led socioeconomic change in China to spur growth, including the loosening of the one-child policy. He says that the country’s aging work force has benefited from the concentration of resources on a smaller number of children but that its continuation could harm the country’s social structure by burdening lone children with their elderly parents’ care.
Song laments that his 3-year-old son probably will be a member of the first generation in history in which the bulk of the population is only children born of only children.
One area where China has made progress, Song says, is in the reliability of its economic data, though Song still spends as many as four hours every day studying the methodology behind the reports he gets.
Song became fascinated with economics as a child growing up in northeastern China and watching prosperity rise under Deng Xiaoping, China’s paramount leader from 1977 until his death in 1997. He would measure progress by the size of the cabbage and radish crops.
“Every single year, there was change in your living standard, and every 10 years, you just see a dramatic change in terms of the life around you and also in the whole economy,” he says, adding that he continues to be excited by the rapid evolution of China’s society and economy.
China and the United States share one demographic: an aging population, says Dean Maki, chief U.S. economist at Barclays, who’s ranked No. 2 among U.S. economic forecasters and No. 3 for his unemployment forecasts.
“The biggest single factor driving the unemployment rate lower in recent years has been the retirement of the baby boomers,” he says.
Maki, 47, challenges the conventional wisdom that the unemployment rate is dropping — it fell to 7.9 percent in October from 8.7 percent a year earlier — because discouraged workers have stopped trying to find jobs.
“There seems to be this ever-present view that we’re going to see a surge in the labor force participation rate any day now,” he says. “We think of it as something of an urban legend, something that people seem to want to believe but has never actually happened in the past.”
Maury Harris, chief economist for UBS Securities, a unit of UBS, was No. 1 in last year’s ranking of forecasters of the U.S. economy. He says the return of discouraged workers will put upward pressure on the unemployment number as they return to work. His team, which was No. 1 this year in forecasting unemployment, predicted in November that the United States would show steady labor market improvement and finish 2013 with 7.5 percent unemployment.
Aside from improvement in the labor market picture, the U.S. economy could most benefit from a reduction in the federal budget deficit, Shapiro says.
“This is a tumor in the economic body, and right now it’s one that doctors can poke without killing the patient,” he says. “The longer you wait, the less that is likely to be the scenario. If we didn’t have that tumor, we could cope with all the other maladies a lot better.”
In the year to come, Ramirez says she thinks her firm’s guarded approach will again yield an accurate picture of the U.S. economy’s bumpy path to recovery.
“I’m optimistic by nature,” she says. “It’s just sometimes I get cautious about it.”
The full version of this Bloomberg Markets story appears in the magazine’s January issue.
How Bloomberg Markets crunched the numbers: To identify the top economic forecasters, Bloomberg markets focused on estimates submitted for key indicators in 11 countries — Australia, Brazil, Canada, China, India, Japan, Mexico, Poland, South Africa, the United Kingdom and the United States — plus the euro zone. The countries were chosen because their gross domestic products rank among the top 25 in the world. The euro zone was chosen because it functions to some extent as a single economic unit. (To avoid double counting, countries in the euro zone were not ranked separately.) Each country had to have a minimum of 15 forecasts in at least three indicators to qualify for the ranking. The U.S. ranking was the most robust, with 13 indicators. They were: GDP, consumer price index, durable-goods orders, existing-home sales, housing starts, industrial production, the Institute for Supply Management manufacturing index, new-home sales, non-farm payrolls, personal spending, producer price index, retail sales and unemployment. The euro-zone ranking was based on nine indicators: consumer confidence, CPI, economic sentiment, industrial confidence, GDP, industrial production, M3 money supply, PPI and unemployment. By contrast, the Brazil ranking included five indicators and the India ranking, just three. In almost all places, CPI and GDP were considered. Ranking rules: Two years of forecasts, from October 2010 to September 2012, were considered. To qualify for a ranking on a weekly indicator, individual forecasters had to have made at least 65 of the 104 possible forecasts. For a monthly indicator, they had to have made estimates for at least 15 of the 24 months. And for quarterly indicators, five calls were required. Forecasters who did not provide any estimates in the latest three forecasting periods were excluded. The forecasts and actual reported numbers were compared, and individuals received a score of zero to 100 based on the accuracy of their historical forecasts in each indicator. Economists with fewer forecast errors relative to other forecasters received higher scores. The scores received for each indicator were averaged to determine each forecaster’s rank in a country or region. The top forecasting firms were identified by averaging the overall scores their forecasters received in all regions. A firm had to be ranked in the United States and in at least four of the 11 remaining geographical areas to qualify.