Forecasting in recessions

St Louis Fed has released this short research note evaluating performance of private sector forecasters. It says:

During a recession, the mean squared errors (MSEs) associated with forecasts of GDP growth and the unemployment rate are 0.58 and 1.95, respectively. In each case, the MSEs are four times larger than those made when the economy is not in a recession. Even if the very large errors during and immediately after the 1981 recession are omitted from the calculations, the MSEs are still roughly twice as large—a smaller but still significant difference.

One main contributor to the deterioration in the forecasts is an inability to detect turning points—that period when the economy shifts from being in a recession to not being in a recession—and vice versa. Another contributor is a clear bias in the forecasts during a recession. Forecasts of GDP growth and the unemployment rate both generally tend to be overly optimistic: Forecasts of GDP growth tend to be too high, whereas those for the unemployment rate tend to be too low. Perhaps not surprisingly, the degree of accuracy of the two series tends to move together; the correlation between the two series is roughly 80 percent.

Deserves a 🙂 This is precisely the finding of this Prakash Loungiani study as well. Forecasters failed to anticipate Japan slump as well and only when the economic situation looked really bad, were the forecasts revised downwards. My research on India growth also seems to point the same – forecasters revise predictions only when actual numbers change.


2 Responses to “Forecasting in recessions”

  1. How about forecasting US Per capita income for 2007 in 1928 and getting it almost right? « Mostly Economics Says:

    […] finding! Though, I am not a big fan of forecasting, this one is quite […]

  2. Michael Mussa on the art of economic forecasting « Mostly Economics Says:

    […] Forecasting in recessions […]

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