The science and art of economic forecasting

Published on July 31, 2017   16 min
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Hi, my name is Matt Murray, I'm an economist at the University of Tennessee. I serve as the Associate Director of the Boyd Center for Business and Economic Research. I'd like to take a little bit of time today to talk to you about the Science and Art of Economic Forecasting.
Economic Forecasting is very important here in Tennessee. We provide a forecast that helps inform stakeholder groups in particular, state government. We build our forecast around an annual report that is referred to as the economic report to the Governor of the state of Tennessee. That forecast report provides a short-term and long-term economic outlook for the national economy, and a detailed forecast for the state economy as well. The forecast is used directly for planning and budgeting purposes by the state, but also by local governments and by members of the business community. It's also used to inform our key stakeholders, and that's particularly the executives in state government, from the governor on down through the cabinet, provides them with background and context. So, it's all about economic forecasting in the data, but it's also all about the context that surrounds that economic outlook. We use the forecast as an input for other forecasting activities at the Boyd center. So it's not a one off forecast; in fact, the economic forecast helps drive our forecast of welfare caseloads, our forecast of the Unemployment Insurance Trust Fund for the state, as well as state tax revenues.
We produce our report right after the first of the year. Here's a screenshot of our most recent report, that was released in January of this year. The economic report to the Governor actually has a foundation in the Tennessee Code - there was a legislative mandate in the mid 1970's, that required that a forecast be produced, a forecast of state personal income, that would serve as an upper bound for growth in state tax revenues. And that is a binding constraint. And if the forecasted personal income level is lower than the projection in state tax revenues, the state must adjust its revenue plan accordingly. It includes a narrative, as well as detailed appendix tables that show historical and projected data.