Recession Forecasts Are So Bad, They’re Good

From Bloomberg:

Economists, notoriously terrible at predicting downturns, may be inadvertently providing a useful service.

It’s no secret that economists are terrible at predicting recessions: a host of studies, along with a raft of anecdotal evidence, reveals a track record that is astonishingly bad. This has prompted a growing number of market watchers to conclude that forecasting recessions is a fool’s game.

But there’s another way to look at this dismal record. What if economists are so bad at predicting recessions that they’re actually good? What if a profession that consistently, almost universally, gets something wrong is inadvertently getting something right?

Prakash Loungani and his colleagues at the International Monetary Fund conducted the most sophisticated studies of economic forecasting, assessing the accuracy of economists in 63 countries between the years of 1992 and 2014. The results, as my colleagues at Bloomberg have noted (see here and here) are mind-blowingly awful. In fact, every single country displayed the exact same bad track record of predicting recessions. Moreover, as Loungani and his co-authors noted, “the forecasts of the private sector and public sector are virtually identical; thus, both are equally good at missing recessions.”

Good at missing recessions. Think about that for a moment. Economic forecasts consistently miss the onset of recessions.

This means that their failure to predict is a problem altogether different from the failures emphasized by the random-walk hypothesis and other critiques of prognostication. Economists predict the future incorrectly, but their failures are, well, predictable. Does that mean they may be telling us something important after all?

To understand the implications of this question, consider the typical progression of erroneous forecasts over the course of a recession’s first year. Loungani found that forecasts made on the eve of a recession (when almost no one imagines there’s trouble brewing) are more or less in line with the previous year’s predictions.”

Continue reading here.

Posted by at 11:20 AM

Labels: Forecasting Forum


Subscribe to: Posts