by Robert Krol
February 24, 2014
Forecasts of future economic activity underlie any budget revenue projection. However, the forecasters in a government agency may face incentives or pressures that introduce forecast bias. This article evaluates the accuracy of the Congressional Budget Office (CBO), the Office of Management and Budget (OMB), and the Blue Chip Consensus forecasts of real GDP growth. Assuming a symmetric loss function, the unbiased forecast hypothesis is rejected for the five-year forecast, but not the two-year forecast. Estimates indicate a significant upward bias in the OMB forecast. This is interpreted to mean executive branch political pressure influences the forecast. In contrast, both the CBO and Blue Chip forecasts have a downward bias. The CBO economic outlook is consistent with the private sector forecast. By addressing the issue of intentional forecast bias, this study highlights the roll political pressure and institutional design may play in economic forecasts.