On Wednesday the Fed issued its latest policy statement and accompanied it, as always, with economic projections. They project the economy will grow by 2.3 to 2.6 percent, in real terms, in the fourth quarter of 2013 relative to the fourth quarter of 2012. That speeds up to 3.0 to 3.5 percent in 2014 and 2.9 to 3.6 percent in 2015. Unemployment also is projected to fall, hitting 5.8 to 6.2 percent in 2015, all while inflation stays below 2 percent. Hooray!
Or, rather, hooray? It's hard to get too enthused about these projections, and not just because 5.8 percent unemployment — well above the rate we'd have if we had full employment — eight years after the recession started in December 2007 is really embarrassing. But the bigger reason not to get too excited is that the Fed is wrong all the time.
I went back through every June forecast the Fed has released from 2009 to this year. Each of those forecasts included projected growth, unemployment and inflation rates for the year in question and the two years after. So the 2009 projection forecast 2009, 2010, and 2011, the 2010 projection forecast 2010, 2011, and 2012, and so forth. And those forecasts just kept getting less and less optimistic as the years wore on:
As you can see above, in 2009 the Fed was predicting 4.2 percent growth in 2011. Awesome! But then in 2010 it revised that down to 3.85 percent growth. And in 2011 they revised it further to 2.8 percent growth. And when all was said and done, the economy only grew about 2.4 percent that year. The Fed projected growth almost twice as fast as what actually happened.
Same deal for 2012. The Fed's first forecast, in 2010, projected 4 percent growth. 2011's projections reduced that to 3.5 percent growth. 2012 knocked it down to 2.15 percent growth. And the final number was about 2 percent.
It's worth noting that other projections have this problem too. As Andrew Fieldhouse and Josh Bivens at the Economic Policy Institute have noted, the CBO seems to always think that the economy will be back on track four years from whenever they happen to be making a projection.