Apodaca: Chapman experts make an economic forecast for the coming year

Economic forecasting is a data-driven exercise. Lots and lots of numbers are crunched and formulas applied. Only math geeks need apply.

Or so the stodgy image would lead us to believe.

But there’s more to it than that. Otherwise, every forecast would predict exactly the same thing. While the majority tend to move in the same direction with their predictions, there’s always some divergence when it comes to degrees of change expected, and some forecasters have been known to buck the consensus and go out on a limb on occasion.

The fact is that a certain amount of art is involved in the discipline of divining our economic future, even with the most rigorously statistics-based forecasts. Just ask the folks behind Chapman University’s closely watched economic forecast.

“It definitely is not a perfect science,” said Raymond Sfeir, the director of Chapman’s A. Gary Anderson Center for Economic Research and Anderson Chair of Economic Analysis. Sfeir and Chapman’s President Emeritus James Doti are the lead authors of the forecast.

“There is an art to it. You cannot just run the model and say ‘This is it.’ The equations cannot depict the real world 100%. You need to make sense of what the equations are giving you.”

That appreciation for nuance — along with a keen attention to the ways that economic variables connect with other variables — might explain the Chapman forecast’s reputation for a relatively high level of accuracy over its 47-year history.

When revealing its annual forecast last month, Chapman included a comparison of its accuracy vs. other well-known forecasters such as investment banking giants Morgan Stanley and Goldman Sachs and other universities like UCLA. This study is performed every couple of years — a clever bit of data-driven marketing that has helped solidify the stature of the economics department and, arguably, the university as a whole.

Two years ago, Chapman’s analysis found that it ranked No. 1 in accuracy for its prediction of the nation’s real gross domestic product (GDP) from 2004 to 2021 — a range of time, it should be noted, that included the Great Recession and the COVID-19 pandemic. This time around it retained the top position, although it pointed out that the scores were extremely close within the upper echelon. Economic forecasting, it turns out, is also a game of inches.

Those inches matter though. Chapman’s forecast is intently followed by members of the business community. Hundreds of them attend the forecast presentation in person, and thousands more watch online, hoping to glean clues that will be utilized in their decision-making.

They are eager to know the most likely outcomes for the direction of the economy in the coming year. Will we keep growing? If so, how much? What are the chances of a recession? What will happen with interest rates, consumer spending and prices? The answers to all these questions will influence important choices they make about their companies, including whether 2025 will be the right time to expand and hire more workers.

Opinion

Apodaca: Driving responsibly is a gift that could last a lifetime

Recent news stories and wreckage left behind from a crash on Jamboree Road serve as a reminder to slow down and drive safely during the holidays.

Dec. 18, 2024

Sfeir acknowledged that some factors that have influenced the economy have been trickier to predict, and as a result some assumptions Chapman has made have been a bit off at times. He was surprised, for example, by consumer behavior during and after the pandemic, when Americans initially splurged on manufactured goods, followed by a dramatic shift to spending on services and experiences such as travel and restaurant dining.

So what did Chapman predict in its latest forecast?

To broadly summarize, no recession is expected in 2025. The economy will continue to grow, but more slowly and mainly because of “massive injections of fiscal stimulus” by the federal government. Inflation will rise, and the Federal Reserve Board will continue lowering interest rates, but not much.

Sfeir does have worries, primarily about the huge federal deficit that politicians in both major parties not only avoid dealing with but actively contribute to by promoting measures that will continue to balloon the debt. That’s a big negative for the economy, he said, and a guarantee that an ever-growing share of federal revenues will be used just to service the debt.

There are other open questions and causes for concern. Notably, the incoming administration has promised to impose steep tariffs on foreign goods, which Sfeir said would lead to higher consumer prices.

“We know this is not going to help inflation,” he said. “Thats why interest rates will not go down much next year. We expect inflation next year to go up.”

The impact of the immigration policies the new administration intends to pursue is another potential negative. If thousands and thousands of undocumented immigrants are deported, that would result in higher costs for businesses and higher prices for consumers. But Sfeir said it’s impossible to give a definitive prediction without knowing the details and scope of the policies.

What’s more, Orange County and California overall have some particular issues — primarily our extremely high housing costs — that are expected to continue to be a drag on the economy.

As usual, these economic prognostications include all sorts of caveats. In spite of its solid track record, Chapman’s forecast is not meant to be an attempt at fortune telling. It’s an educated guess backed by all those numbers it continually collects and analyzes — coupled with a hearty application of artistic license.