CBO’s Record Economic Forecasts: Update 2023

In this report, the Congressional Budget Office reviews its biennial and five-year economic forecasts and compares them to forecasts from the administration and the Blue chip consensus, an average of about 50 private sector forecasts.

Variables examined. CBO examines its forecasts of output growth, the unemployment rate, inflation, interest rates, and wages and salaries.

Measures of quality. CBO focuses on four measures of forecast quality: mean error, mean absolute error, root mean square error, and two-thirds dispersion of error that help the agency identify the centeredness (i.e., the opposite of statistical bias), accuracy, and dispersion of its forecast errors.

The quality of CBO forecasts. Most CBO forecasts of output growth, unemployment and inflation contained mean errors close to zero, but CBO’s estimates of interest rates and wage growth averaged too high. As measured by mean squared error and mean absolute error, two-year forecasts are generally no more accurate than five-year ones.

Comparison with other forecasts. The degree of centeredness varies by predictor and variable. For example CBO and the Blue chip consensus tends to produce more centered forecasts of output growth but less centered forecasts of interest rates than the government. CBO forecasts are generally more accurate than the administration’s estimates and have the same or smaller two-thirds spreads for most variables. For all four quality measures, the forecasts of the CBO are roughly comparable to those of the Blue chip agreement.

Sources of forecasting errors. All forecasters failed to anticipate certain key economic developments, resulting in significant forecasting errors. The main sources of those errors are turning points in the business cycle, changes in labor productivity trends and crude oil prices, the downward trend in interest rates, the fall in labor income as a percentage of gross domestic product, data revisions and the coronavirus pandemic.

Forecast Uncertainty. In this report, CBO uses past forecast errors to measure the uncertainty of current forecasts. For example, using the root mean square error, the agency estimates that there is about a two-thirds chance that economic growth over the next five years will average between 0.6 percent and 3.1 percent. The central estimate of the CBO in February 2023 was 1.9 percent.