A LONG time ago in a country far away, I was a first-year graduate student, struggling to pay my tuition fees.

Text/Graphics: Larry Haverkamp and Maroo

To help, my university gave me a part-time job. As the newbie, I did the tedious work no one else wanted: I input data for the university's Wharton Econometric Forecasting Model.

It is a huge computer program that analyses thousands of bits of past data and then spits out predictions about the US economy's future.

The results are publicised and form the starting point for simple 'back of the envelope' forecasts by dozens of economists. They tweak the numbers and come up with their own slightly different forecasts.

From there, media companies survey 50 or so well-known economists and publish the 'consensus outlook' for GDP and unemployment.

Our Monetary Authority of Singapore conducts a similar quarterly survey of over 20 local forecasters.

Once I had updated the data, we ran the computer model. It was an exciting moment for me. I expected a ho-hum 'normal' forecast of 4 per cent for both GDP growth and unemployment.

The results shocked me. The model predicted negative GDP growth and double-digit unemployment.

It meant the US was headed for a deep recession. It seemed impossible.

A colleague took a look at the data, handed it back to me and said: 'You're the new guy. You show it to the boss.'

I did and - to my amazement - he wasn't surprised at all. He said: 'Hmm, I'd better make some adjustments.'

He changed a few weights and assumptions. We ran it again, and the computer still gave us nonsense answers.

We repeated the process until we finally got it 'correct' on the seventh run. It showed GDP growth and unemployment close to 4 per cent.

I remember the boss said: 'It's good enough. Let's go home.'

The next day, newspapers carried our forecast for 'a mild 4 plus 4' for both GDP growth and unemployment. I laughed and thought: 'If only people knew how we arrived at those numbers.'

As the years went by, I learnt more tricks of the trade, but the biggest may be that computers and equations do only part of the work.

Most is done by forecasters who adjust the data until it agrees with their intuition.

I later learnt a rule of thumb that 30 per cent of the forecast comes from the computer and 70 per cent from the forecaster.

How accurate are these forecasts? Well, they do great when changes are small and there isn't much to forecast.

In January 2007, however, nearly every economist predicted continued economic growth and no recession.

Wow, were they wrong! We have just gone through the longest and deepest recession since World War II.

Now, economists are telling the opposite story and predicting a quick V-shaped recovery. It merits scepticism, given their (i) methodology and (ii) past track record.

Defining away the problem

CONSIDER this: Unemployment rates in the world's two largest economies - the US and Europe - are well over 9 per cent and are expected to hit 10 per cent.

The third and fourth largest economies - Japan and China - have unemployment of only 5.7 and 4.3per cent. It is about half!

How are Japan and China able to manage their economies so much better than the West?

Appearances are deceiving. The secret is their skill in defining the word 'unemployment'.

Japan does it by not including its huge army of part-time workers in its labour force. When they lose their jobs, the unemployment rate doesn't budge.

China is even bolder. If someone fails to register with the government as 'unemployed', they are not counted. Millions don't bother to register.

China also doesn't count hundreds of millions of farm workers, many of whom go to the cities and can't find work.

The rationale is that there is always work to do on a farm, so the migrant workers could be employed if they would only return home.

It has held China's unemployment rate at 4.3 per cent, among the world's lowest.  Back to Columnists