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Dollars and Sense
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The UCLA Anderson Forecast is an essential tool for the nations economic policymakers
By Wendy Soderburg 82
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When it first started 50 years ago, the UCLA Anderson Forecast (then called the
UCLA Business Forecasting Project) was a modest affair: five or six economists got
together for a roundtable discussion to present their views on different sectors of the
national economy. After about an hour, other faculty members who attended the session
filled out a questionnaire focusing on the key economic variables theyd just heard
discussed, and the answers were tabulated, resulting in a median forecast for each area ¾
the gross national product, for instance.
That was in 1952, under the direction of Economics Professor Robert M.
Williams M.A. 42. Today the Forecast, with Edward E. Leamer, the Chauncey J.
Medberry Professor of Management, at its head, is one of the most respected yardsticks
of the states and nations economies, a tool that is sought after and relied upon by
government economists, businessmen and journalists throughout the country. Its findings
¾ generally announced at quarterly conferences ¾ are routinely reported in newspapers
and magazines worldwide, from the Los Angeles Times to The Economist of London, and
its senior staff members are constantly sought out for their expertise on matters ranging
from the energy crisis to housing to unemployment.
The basis for that credence perhaps is the willingness of the forecasters in recent
years to not focus solely on the numbers and, instead, to frame their projections within
the context of the forces that cause the economy to sway in one direction or another.
My view is that forecast numbers are unintelligible and meaningless, Leamer
says. What youve got to do is show a picture that communicates the main message, and
then you must tell the story as well. Dont come here for the what of the forecast, which
is the numbers. Come here for the why. Im going to tell you why I think this; if you
listen to me, and if you agree, youre going to understand my message.
Leamer admits that this approach was, at first, upsetting to several regular
conference attendees, who had come to expect more of an emphasis on the numerical
forecasts. The numbers are still provided, of course, but Leamer is more concerned about
giving his listeners insight.
The numbers are not important; the issues are, agrees Donald H. Straszheim,
vice chairman of the Milken Institute, an economic think tank in Santa Monica, Calif.
Whats important is for people to systematically think about what they believe has
changed, how behavior is going to change among individuals from corporations, among
governments, among international players. This seems to be the direction in which Ed is
taking the whole endeavor, and I wholly support that.
The offices of the Forecast occupy a quiet corner of Leon and Toby Gold Hall in
UCLAs Anderson School. The cramped quarters feel somewhat isolated from the rest of
the schools busy surroundings, and if one didnt know better it would be easy to assume
that there wasnt much going on here. But, as the saying goes, looks are deceiving. Using
the combination of professional expertise and the latest computer-based econometric
models, the tiny staff of four churns out four major forecasts a year, reports that help
illuminate the underpinnings of the local, state, national and global economies. At age 50,
it is the oldest major forecasting group in the West and is included in the Blue Chip
Economic Indicators survey, one of the top consensus forecasts in the country.
Which is not to say that the Forecasts predications are uniformly embraced.
When it predicted recession in 2001, for example, we were accused of being pessimistic
because we called the recession early, Leamer says.
Then came the terrorist attacks of September 11.
After the assaults on New York and Washington, D.C., other economists who
didnt before see a recession in the offing suddenly were saying, Oh, the recession is
here, and its caused by the terrorists. The Anderson forecasters, however, were not so
quick to rush to that judgment. Our response was to say, Lets be more thoughtful here
and think about whether this was really going to be a recession-causing event, Leamer
says. My view was that [those predicting recession in the wake of the attacks] were
giving the terrorists way too much credit.
Leamers view is shared by Washington Post economics writer Steven Pearlstein.
I noted last year, when I was thinking that the economy was in much worse shape than
other people thought, that Ed had been issuing some warnings, Pearlstein says. So I
called him up and was impressed with the way he thought about the economy. Because
he thinks about it differently.
On campus, the Forecast is more than just a group of numbers-crunchers working
in blissful solitude at the difficult task of predicting economic trends. It supports
management education through teaching, supervision of M.B.A. field-study projects and
training Ph.D. students in advanced econometric model building and forecasting
methods.
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Just how all this is achieved so successfully and for so long is a remarkable
story. The Forecast is virtually self-supporting, receiving most of its funding from
seminar membership, consulting fees and its conferences, which have drawn speakers
such as Pete Wilson, former governor of California; Kathleen Connell Ph.D. 87, California state controller;
and Leon Panetta, chairman of the U.S. House Budget Committee and later White House chief of staff to
President Clinton.
It has managed to survive countless ebbs and flows, much like the economy it
studies so closely.
From its humble beginnings in 1952 under Bob Williams, the Business
Forecasting Project, or BFP, expanded eight years later with the presentation of its first
annual public forecast conference. In 1968, the UCLA Business Forecasting Seminar was
established to fund the construction of more complex econometric models and the
production of quarterly conferences. Initial corporate members included Bank of
America, General Telephone, the Los Angeles Times and Southern California Edison.
The Forecast staff also continued to grow. Besides Williams as director, Donald
Ratajczak joined the faculty of the Graduate School of Management in 1968 and assumed
primary responsibility for forecasting and model construction. Although he stayed just a
few years, Ratajczak developed a sophisticated model of the state economy based largely
on employment and personal income data, an approach that the staff still uses today.
It wasnt until 1981 that the Forecast got its second director, Larry J. Kimbell, an
economics professor who joined the staff in 1973 to take over Ratajczaks job of
producing the forecast numbers. When Bob Williams retired in 1981, he handed the reins
to Kimbell, who sought to accomplish two things: strengthen the Forecasts ties with
major banks, aerospace firms, utilities and government entities in California, and finish
Ratajczaks task of converting the Forecast from a consensus-based model to a fully
computerized, econometric model.
During his first few years as director, Kimbell worked to get the Forecast online,
an ambitious task at a time when people were still using large, mainframe computers. In
1978, he acquired a personal computer and began to wean the staff away from depending
on Data Resources Incorporated, a mainframe system that furnished time-shared access to
specialized databases on California and the U.S. As a result, the Forecast staff was able to
make its U.S. forecast available online in the late 70s and was downloading stock market
data in the mid-80s on an extensive basis.
We were certainly ahead of our time in California, says Kimbell, who won the
Sterling Prize in 1988 for the most accurate forecast of the U.S. economy. In some
sense, what you see now as routine was nothing new to us 20 years ago. We were very
advanced in terms of the technology of forecasting, and I think thats been very
important.
Ted Gibson, chief economist for the California Department of Finance, says he
started attending the Anderson Forecasts conferences during Kimbells early days as
director. Here in Sacramento, the Forecast has a very unique position, not only for us but
also for our counterparts in the Legislative Analysts Office, Gibson says. Its very
well-respected in the Legislature and by the governor because its sort of a disinterested
third party. Often, when we present a forecast, the first question were asked is, What
does UCLA say?
In 1990, Kimbell took a two- year leave of absence to become director of
macroeconometric forecasting for the WEFA Group in Pennsylvania. Taking his place as
director of the BFP was young David Hensley M.A. 84, Ph.D. 89, who had been
serving as director of California forecasting since 1987. Hensley clearly recalls the
awkwardness of being in a position usually reserved for faculty members.
My situation was frankly quite tenuous, and I was actually made acting
director, he says. I dont think it was entirely obvious what they were going to do with
the forecast when Larry left, or whether I would be in that position for very long.
Hensleys opinion is that some people had problems with the nature of the
forecast activity itself; that they viewed the BFPs research as applied, not academic. I
suspect that people looked at us and wondered why, exactly, is the university doing this?
And if its that successful, maybe it should be done outside of the university, Hensley
says.
But any fears the administration had were eased when Hensley and his staff
attracted attention for accurately predicting the recession of the early 90s. The Forecast
maintained that California was a costly place to do business for several reasons: It was
highly regulated, housing was too expensive for most people and there was slow
migration into the state. Then when the recession actually occurred, the Forecast took a
stronger position on the aerospace and defense downturn than anybody else.
We gradually acquired a reputation of being negative on California, Hensley
recalls. There was a certain amount of bitterness about our forecast, that we were part of
the problem and that we were creating a sense of anxiety that didnt need to be there.
Eventually all that faded, and everyone went in our direction. Even we underestimated
the magnitude and severity of what was happening, and all of us were sort of humbled by
what ultimately came down.
Despite their gloomy predictions, Hensley says, the Forecast never got any flak
from the state government. Gov. Wilson was actually one of our big supporters, and he
never had anything but good things to say about the Forecast, Hensley says. In fact,
Wilson appeared as keynote speaker at the Forecasts June 2001 conference, which
focused on the states energy crisis. It would be fun to be the bearer of good tidings, the
former governor told the crowd. It is more fun if you can be pleasantly surprised. But
whats most important is to be accurate, and [the Anderson Forecast] has been with its
remarkable record.
When Hensley now vice president of J.P. Morgan Chase & Co. in New York
left UCLA in 1993, Kimbell took over the directorship of the BFP once again. He
appointed economist Tom K. Lieser Ph.D. 77 as executive director of the forecast in
1997 and spent the last year of his career at the Forecast as co-director with Daniel J.B.
Mitchell, professor at the Anderson School and at the School of Public Policy and Social
Research. When Kimbell retired to his hometown of Amarillo, Texas, in 1999, Mitchell
became the sole director from July 1999 to June 2000, followed by Leamer.
As this story nears publication, the Forecast staff is preparing for its December
conference, California in the Global Marketplace, and will celebrate its 50th
anniversary by inviting former directors and prominent staff for a reunion. Dan Mitchell,
Larry Kimbell and Kimbells former chief assistant, David Shulman M.B.A. 66, Ph.D.
75 now managing director at Lehman Brothers, Inc. will be there, and Bob
Williams, who has been ailing, has been invited. Yoshi Inaba, president and CEO of
Toyota Motor Sales, USA, Inc., will address the morning session, and Gov. Gray Davis
has been invited to speak in the afternoon.
In attendance will be Anderson School Dean Bruce Willison 70, himself a
businessman. Going back decades now, the Forecast has built a strong reputation for its
accuracy, Willison says. But two important things are happening: First, were reaching
out to the business community and providing this insight and guidance as to whats
happening behind the numbers. Secondly, were reaching further into our own school to
incorporate more faculty and student involvement, where we have a variety of expertise
that cuts across industries and into a lot of different sectors.
Providing insight is the name of the game, says Leamer.
Thats what Im trying to emphasize, he says. The forecast is an educational
event.
Wendy Soderburg is senior editor for UCLA Magazine.
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