Ian Shepherdson knew he was sticking his neck out. But recently he went public with a startling forecast: the next government labor market report would show that the U.S. economy had created 850,000 jobs in December.

Less than 24 hours later, it became clear that Shepherdson, the chief economist and founder of Pantheon Macroeconomics, had missed the mark and missed badly. Employers in the last month of the year actually had hired just 199,000 workers, less than one-fourth the number he predicted, according to the government’s closely watched monthly tally.

For Shepherdson — and many others on Wall Street — the jobs forecast was both an unmitigated flop and an illustration of how difficult the pandemic makes it for even the most astute observers to assess the $23 trillion economy.

“Everybody wants to be pursuing precision,” he said in an interview. “But even before COVID, it was like hitting a moving target from a moving vehicle. Now, we’ve got a blindfold on as well.”

The pandemic is making a tough job even tougher. As the virus waxed and waned, it delivered some of the wildest ups and downs in U.S. labor market history. The COVID recession and recovery also erased economic relationships, emptying downtown office districts, sending workers to toil in their living rooms and leaving economists fumbling.

That’s resulted in an economy perched uncomfortably between the world of early 2020 and whatever reality will emerge once the pandemic is a memory. Meanwhile, familiar relationships between key economic variables have gone haywire.


Though wages are growing faster than at any point in the decade before the pandemic, for example, the number of Americans lured back into the labor market has been disappointing. Two years after COVID-19 first hit the U.S., the labor force participation rate remains near its lowest mark since the 1970s, when women began entering the workforce in significant numbers.

Yet a different measure, which tracks the number of employed Americans 25 to 54 years of age, relative to the total population, last year showed the fastest one-year gain since the government began keeping track in 1949.

“This is a historically unique U.S. economy,” tweeted economist Skanda Amarnath, executive director of Employ America, a nonprofit that promotes tight labor markets.

Monthly jobs gains also have been exceptionally volatile. In the last half of 2019, each month’s hiring ranged between 161,000 and 234,000 individuals. The last six months of 2021 saw swings between 199,000 and 1.1 million.

All this tumult has left government and private-sector economists struggling to fathom what businesses, workers and consumers will do next.

“It is extremely difficult to forecast in the current environment,” said Gregory Daco, chief U.S. economist for Oxford Economics. “It requires a heavy dose of humility. We’re more likely to be wrong, given how rapidly things are shifting.”


Even if economists are well schooled to calculate future levels of hiring, investment or trade, they are no better qualified than anyone else to foretell the next move by a shape-shifting virus or from a hyper-polarized capital.

Still, after more than three decades tracking major economies, Shepherdson is no novice. He is a two-time winner, in 2014 and 2003, of The Wall Street Journal’s award for best economic forecaster.

He also wasn’t alone in botching the December jobs call. The consensus of professional economists called for more than twice as many jobs as were actually added. Moody’s Mark Zandi expected 750,000 while analysts at Goldman Sachs predicted 500,000.

Ideally, economists make predictions by comparing current conditions to a previous period when the underlying structure of the economy was similar, said economist Michael Strain of the American Enterprise Institute. But there is no precedent.

“The problem is what possible period do we have when the economy is close to what it is today?” said Strain, a former Federal Reserve system economist. “Some people are just using the same models they’ve been using and that’s not working.”

Shepherdson isn’t one of them. He says he realized that the pandemic had rendered traditional models “more or less useless.”


So he overhauled his formula to take account of the economy’s makeover, placing greater reliance upon high-frequency data from HomeBase, a provider of scheduling and payroll software for small businesses.

HomeBase data has been praised by Federal Reserve officials for its usefulness in anticipating labor market moves. But the firm has been producing its monthly reports only since the start of the pandemic. Relying on a shorter data series inevitably means a fatter margin of error, Shepherdson said.

“Until we’ve got five years of this HomeBase data, we won’t really know how useful it is,” he said.

Forecasters today face a double-barreled challenge: uncertainty over both where the U.S. is in the business cycle and what the post-pandemic economy will look like, according to Erica Groshen, senior economic adviser to Cornell University’s industrial and labor relations school.

The adjustments that government economists use to compensate for routine seasonal fluctuations, including retailers’ big holiday season hiring and firing cycle, also are misfiring amid the pandemic.

“Models are predicting what’s normal in a world that isn’t normal,” said Groshen, a former head of the Bureau of Labor Statistics.


This is not the first time models have failed. In 2008, many Wall Street firms were stunned when the housing implosion triggered huge losses on mortgage-backed securities. The big banks’ “value-at-risk” models, based on years of housing market data, had made no provision for housing prices to decline on a national basis.

Since previous downturns had been limited to specific regions, Wall Street’s best-and-brightest assumed future declines would be similarly limited. When they weren’t, a wave of foreclosures led to massive losses. Venerable firms such as Bear Stearns, Lehman Brothers and Merrill Lynch failed or were swallowed up by rivals. American households’ net worth fell by more than $11 trillion.

“This entire market depended on finely honed computer models — which turned out to be divorced from reality,” concluded the 2011 report of the Financial Crisis Inquiry Commission.

Wall Street’s reliance on the past to predict the future has limits. But if the pandemic has so unhinged traditional economic relationships and undermined the quality of key inputs, some wonder what’s the point of issuing forecasts.

“I personally think all these forecasts are just marketing for the firm,” said Barry Ritholtz, whose N.Y.-based investment firm manages more than $1.5 billion in assets. “The least valuable part of the forecast is the actual number. It’s the process that brings something to the table.”

The prediction game won’t get any easier any time soon. The omicron variant may distort the Labor Department estimate for January hiring.

Meanwhile, Shepherdson took the setback in good humor. He posted a self-deprecating Twitter thread, which included a photo of an old fashioned cocktail labeled “there is only one answer.”

That was just “the start of the evening,” he said.

“It had been a very upsetting day.”