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Are Economic Models Really Predictable? Exploring Their Reliability and Accuracy

Economic forecasts are rubbish. You would think that if we can fly people to the moon and put a vehicle on Mars we can figure out when the next recession will hit us. The problem is we make judgments on the future from what has happened in the past. This leads to a huge amount of bias. When we are in the middle of boom times, people can’t imagine that there will ever be a recession. Equally in the middle of a recession people seem to think we will stay in it for ever. Common sense tells us that the good times can’t go on forever. They never have done. The big question is “when will the good times end?”.

A model developed by the National Bureau Of Economic Research has made me think. Apparently there has been a good deal of research in the past that has shown birth rates track economic cycles. This study by the NBER is the first to show that a decline in fertility is a leading indicator of a recession.

Apparently the decline in fertility would have accurately predicted the recession of 2008 if we’d paid attention to the fact that the growth rate of conceptions turned negative at the end of 2007. At that time the stock market was at an all-time high and yet six months later the recession hit with a vengeance.

The model is not based on this one instance. It uses 109 million births that took place in the US between 1989 and 2016 and looks at how fertility rates changed across the last three economic cycles.

If there is a correlation between fertility rates and the economy, we should quite reasonably ask why this is so. One possible answer is that for many people, having a child is not an accident but a well-considered decision. It could be that the delay in starting the new family is because of a real or an imagined fear of the financial future.

In an article in The New York Times in February last year, the economist, Lyman Stone, told us that the US fertility rate reached 1.77 children per woman in 2017, a 38-year low. If the NBER model is correct, this decline in fertility could mean that we are about to see the beginning of the end of the good times.

On the other hand, it is just possible that this lower fertility rate is the result of more diligent contraception, delays in marriage, or just that we are having less sex. And the economic decline that is hovering could have nothing to do with fertility rates but be the direct result of the Trump trade tariffs, the decline of the automotive industry and Brexit.

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