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      Copyright © 2015 by Maury Harris. All rights reserved.

      Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

      Published simultaneously in Canada.

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       Library of Congress Cataloging-in-Publication Data

      Harris, Maury.

      Inside the crystal ball: how to make and use forecasts / Maury Harris.

      pages cm

      Includes index.

      ISBN 978-1-118-86507-1 (cloth) – ISBN 978-1-118-86517-0 (ePDF) – ISBN 978-1-118-86510-1 (ePub)

      1. Economic forecasting. 2. Business cycles. 3. Forecasting. I. Title.

      HB3730.H319 2015

      330.01′12 – dc23

      2014027847

      Acknowledgments

      A long and rewarding career in forecasting has importantly reflected the consistent support and intellectual stimulation provided by my colleagues at the Federal Reserve Bank of New York, the Bank for International Settlements, PaineWebber, and UBS. Senior research management at those institutions rewarded me when I was right and were understanding at times when I was not so right. My colleagues over the years have been a source of inspiration, stimulation, criticism, and encouragement.

      Special thanks are addressed to my professional investment clients at PaineWebber and UBS. Thoughtful and challenging questions from them have played a key role in my forming a commercially viable research agenda. Their financial support of my various economics teams via institutional brokerage commissions has always been much appreciated and never taken for granted in the highly competitive marketplace in which economic forecasters practice their trade.

      For this book, the efforts on my behalf by my agent Jeffrey Krames, who led me to John Wiley & Sons, were essential. At Wiley, the editorial and publications support provided by Judy Howarth, Tula Batanchiev, Evan Burton, and Steven Kyritz were extremely helpful. And the guidance provided by my editorial consultant Tom Wynbrandt has been absolutely superb, as was the tech savvy contributed by Charles Harris. Also, thanks are due to Leigh Curry, Tom Doerflinger, Samuel Coffin, Drew Matus, Sheeba Joy, Lisa Harris Millhauser, and Greg Millhauser, who reviewed various chapters.

      Most importantly, it would been impossible for me to complete this project without the steady support, encouragement, and editorial acumen provided by Laurie Levin Harris, my wife of 44 years. The year of weekends and weekday nights spent on this book subtracted from quality time we could have spent together. I always will be most grateful for her unwavering confidence in me and her creation of a stimulating home environment essential for the professional accomplishments of myself and our two children, Lisa Harris Millhauser and Charles.

      Introduction

      What You Need to Know about Forecasting

      Everybody forecasts – it is an essential part of our lives. Predicting future outcomes is critical for success in everything from investing to careers to marriage. No one always makes the right choices, but we all strive to come close. This book shows you how to improve your decision-making by understanding how and why forecasters succeed – and sometimes fail – in their efforts. We're all familiar with economists' supposed ineptitude as prognosticators, but those who have been successful have lessons to teach us all.

      I have been fortunate to have had a long and successful career in the field of economic forecasting, first at the Federal Reserve Bank of New York and the Bank for International Settlements, and then, for the majority of my working life, on Wall Street. Often I am asked about so-called tricks of the trade, of which there are many. People want to know my strategies and tactics for assembling effective forecasts and for convincing clients to trust me, even though no one's forecasts, including my own, are right all of the time. But most often, people ask me to tell them what they need to know in simple and accessible language. They want actionable information without having to wade through dense math, mounds of complicated data, or “inside-baseball” verbiage.

      With that need in mind, Inside the Crystal Ball aims to help improve anyone's ability to forecast. It's designed to increase

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