The perils of artificial precision

One thing you have to admire about the Conference Board of Canada is their chutzpah. Not only is their "Centre for the North" actually located in the south, but their economic forecasts are remarkably ballsy.

One thing you have to admire about the Conference Board of Canada is their chutzpah.

Not only is their “Centre for the North” actually located in the south, but their economic forecasts are remarkably ballsy.

Their most recent press release said “Yukon’s real GDP will rise by 3.7 per cent in 2014.”

If I recall from English 12 at F.H. Collins, “will rise” is the “future simple” tense and is used when one has certainty about the future.

Less self-confident forecasters like the International Monetary Fund prefer the subjunctive and lard their press releases with weasel words like “forecast,” “projected” and “expected.” Their calls are followed by paragraphs hedging their bets with lots of talk of “overshooting” and “downside risks.”

The conference board people probably don’t really mean “will rise.” They know they’ve been criticized for their epic miss in 2013. Their Yukon forecast said “real GDP will increase strongly by 6.3 per cent in 2013.”

Note again that embarrassing future simple. A few months later they had revised 2013 down a whopping 5.7 points to 0.6 per cent. Economic modelers live in fear of incidents like this, where not just the numbers change but also the “key message.” Instead of the robust growth forecast by the conference board, the Yukon barely avoided a recession.

As fun as it is, we shouldn’t beat up on the conference board too much. Nothing is harder to predict than the future, to paraphrase Yogi Berra.

However, the conference board forecasts do highlight the perils of forecasting in general and of artificial precision in particular.

The conference board’s new annual territorial forecasting model has over 300 equations, including lots of behavioural formulae. It breaks our economy up into 25 sectors and uses input-output techniques to estimate the future. They worked around data restrictions in the North using “calibration techniques to estimate key relationships among economic variables in the model.”

This all sounds very sophisticated. It gets them to quite precise estimates. Remember that the missed 2013 estimate was “6.3 per cent” not something like “around 6 per cent.”

However, let’s remember that we live in a very small economy where individual decisions like whether to delay the F.H. Collins rebuild or cut a shift at the Minto mine can significantly impact the economy.

So how should we think about the latest conference board forecast of 3.7 per cent growth in 2014 followed by 3.7 per cent in 2015? And what about their call that there will be four operating mines in 2017, including Victoria Gold’s Eagle mine?

The first thing is that the conference board economists have done some useful work. The figure of 3.7 per cent probably is somewhere in the middle of the range of probabilities.

But we should also ask them what their range of likelihood is, like political pollsters do when they say things like “plus or minus 3 per cent, 19 times out of 20.” The 2013 forecast of “6.3 per cent” would have been much more useful to people if it had been put in context with a range of likely outcomes.

Consider the difference between these two forecasts: “6.3 per cent and we’re 90 per cent sure it will be between 5-8 per cent” versus “6.3 per cent but could range from a recession to 10 per cent growth.”

Unless you have a feel for the range of possibilities, a mid-point estimate is a very dangerous thing to make decisions with.

As for the forecasts that four specific mines will be in operation, that is very gutsy. One could joke that if the conference board economists are really that confident they should quit their jobs and plough their life savings into Victoria Gold shares.

The Conference Board report is also a bit strange in how it has only three paragraphs on government spending tucked away at the end, despite the fact that our billion-dollar transfer payment is the single biggest driver of economic activity in the Yukon. One significant point that media reports missed was the conference board’s prediction that the Yukon government’s “own-source” revenues will grow more slowly than transfer payments between now and 2026.

If true, this means the Yukon government will become even more dependent on Ottawa over the next decade.

In the end, economic models and their forecasts are useful but one has to know their limits. If you’re making big decisions, you need to supplement them with other intelligence. If you ran the social media chatter from Yukon miners or realtors through one of the fancy, new text analysis systems that some hedge funds use, you might get quite a different forecast from the conference board’s model.

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. You can follow him on Channel 9’s “Yukonomist” show or Twitter @hallidaykeith

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Just Posted

Chief Medical Officer of Health Dr. Brendan Hanley gives a COVID-19 update during a press conference in Whitehorse on May 26. The Yukon government announced two new cases of COVID-19 in the territory with a press release on Oct. 19. (Alistair Maitland Photography)
Two new cases of COVID-19 announced in Yukon

Contact tracing is complete and YG says there is no increased risk to the public

Yukon Energy in Whitehorse on April 8. Yukon Energy faced a potential “critical” fuel shortage in January due to an avalanche blocking a shipping route from Skagway to the Yukon, according to an email obtained by the Yukon Party and questioned in the legislature on Oct. 14. (Crystal Schick/Yukon News file)
Yukon Energy faced ‘critical’ fuel shortage last January due to avalanche

An email obtained by the Yukon Party showed energy officials were concerned

Jeanie McLean (formerly Dendys), the minister responsible for the Women’s Directorate speaks during legislative assembly in Whitehorse on Nov. 27, 2017. “Our government is proud to be supporting Yukon’s grassroots organizations and First Nation governments in this critical work,” said McLean of the $175,000 from the Yukon government awarded to four community-based projects aimed at preventing violence against Indigenous women. (Crystal Schick/Yukon News file)
Yukon government gives $175k to projects aimed at preventing violence against Indigenous women

Four projects were supported via the Prevention of Violence against Aboriginal Women Fund

Yukonomist Keith Halliday
Yukonomist: You don’t know what you’ve got ‘til it’s gone

When I was a kid, CP Air had a monopoly on flights… Continue reading

EDITORIAL: Don’t let the City of Whitehorse distract you

A little over two weeks after Whitehorse city council voted to give… Continue reading

Whitehorse City Hall. (Joel Krahn/Yukon News file)
City hall, briefly

A look at decisions made by Whitehorse city council this week

Northwestel has released the proposed prices for its unlimited plans. Unlimited internet in Whitehorse and Carcross could cost users between $160.95 and $249.95 per month depending on their choice of package. (Yukon News file)
Unlimited internet options outlined

Will require CRTC approval before Northwestel makes them available

Legislative assembly on the last day of the fall sitting in Whitehorse. Yukon’s territorial government will sit for 45 days this sitting instead of 30 days to make up for lost time caused by COVID-19 in the spring. (Crystal Schick/Yukon News file)
Legislative assembly sitting extended

Yukon’s territorial government will sit for 45 days this sitting. The extension… Continue reading

Today’s mailbox: Mad about MAD

Letters to the editor published Oct. 16, 2020

Alkan Air hangar in Whitehorse. Alkan Air has filed its response to a lawsuit over a 2019 plane crash that killed a Vancouver geologist on board, denying that there was any negligence on its part or the pilot’s. (Crystal Schick/Yukon News file)
Alkan Air responds to lawsuit over 2019 crash denying negligence, liability

Airline filed statement of defence Oct. 7 to lawsuit by spouse of geologist killed in crash

Whitehorse city council members voted Oct. 13 to decline an increase to their base salaries that was set to be made on Jan. 1. (Crystal Schick/Yukon News file)
Council declines increased wages for 2021

Members will not have wages adjusted for CPI

A vehicle is seen along Mount Sima Road in Whitehorse on May 12. At its Oct. 13 meeting, Whitehorse city council approved the third reading for two separate bylaws that will allow the land sale and transfer agreements of city-owned land — a 127-square-metre piece next to 75 Ortona Ave. and 1.02 hectares of property behind three lots on Mount Sima Road. (Crystal Schick/Yukon News file)
Whitehorse properties could soon expand

Land sale agreements approved by council

Most Read