The Unassuming Economist

New Paper by Ritong Quc, Allan Timmermanna & Yinchu Zhub

“This paper develops new methods for pairwise comparisons of predictive accuracy with cross-sectional data. Using a common factor setup, we establish conditions on cross-sectional dependencies in forecast errors which allow us to test the null of equal predictive accuracy on a single cross-section of forecasts. We consider both unconditional tests of equal predictive accuracy as well as tests that condition on the realization of common factors and show how to decompose forecast errors into exposures to common factors and idiosyncratic components. An empirical application compares the predictive accuracy of financial analysts’ short-term earnings forecasts across six brokerage firms.”

From The Conference Board.

By Dana M. Peterson & Lynn Franco

“US consumer expectations as measured by The Conference Board Consumer Confidence Index ticked up in October, but this followed three months of declines. Did the declines signal recession in 2022 or just a hiccup related to the Delta variant? We propose the latter.

Indeed, material downshifts in the consumer expectations gauge, with the exception of the pandemic, have preceded US recessions. However, closer examination of the index reveals at least 18 instances since the inception of the measure when there were 10 point or more declines in the index that did not predict recession (Figure 1). Notably, those dips often coincided with shocks to the economy, including wars, bad weather, and happenings in Washington, DC (Figure 2). Indeed, the three month decline in expectations this year occurred while the Delta variant swept across the nation – a sort of shock within the pandemic shock. Notably, consumer expectations were rising earlier this year as vaccinations rose, mobility restrictions lessened, and in-person services began to reopen.”

Continue reading here.

From https://voxeu.org/

By Elena Bobeica, Gabriel Pérez-Quirós, Gerhard Rünstler, Georg Strasserposted on 31 October 2021 

“The recent decade has shown that forecasters need to continuously adapt their tools to cope with increasing macroeconomic complexity. Just like the global crisis, the current Covid-19 pandemic highlights once again that forecasters cannot be content with just assessing the single most likely future outcome – such as a single number for future GDP growth in a certain year. Instead, a characterisation of all possible outcomes (i.e. the entire distribution) is necessary to understand the likelihood and nature of extreme events.

This is key for central bank forecasters as well, as pointed out by ECB Executive Board member Philip Lane in his opening remarks at the 11th Conference on Forecasting Techniques. Central banks rely heavily on forecasts to design their policy and need robust techniques to navigate through turbulent times. They not only ensure price stability and are thus directly interested in the most likely future inflation path, but in the process also contribute to the understanding, managing, and handling of macro-economic risks and thus need to grasp the likelihood of extreme events (see also the discussion in Greenspan 2004).”

Continue reading here.

From a new CESifo working paper by Kajal Lahiri & Cheng Yang

“We forecast New York state tax revenues with a mixed-frequency model using a number of machine learning techniques. We found boosting with two dynamic factors extracted from a select list of New York and U.S. leading indicators did best in terms of correctly updating revenues for the fiscal year in direct multi-step out-of-sample forecasts. These forecasts were found to be informationally efficient over 18 monthly horizons. In addition to boosting with factors, we also studied the advisability of restricting boosting to select the most recent macro variables to capture abrupt structural changes. Since the COVID-19 pandemic upended all government budgets, our boosted forecasts were used to monitor revenues in real time for the fiscal year 2021. Our estimates showed a drastic year-over-year decline in real revenues by over 16% in May 2020, followed by several upward nowcast revisions that led to a recovery to -1% in March 2021, which was close to the actual annual value of -1.6%.”

From VoxEU.ORG

Expectations data indicate the US is entering recession about now

By Alex Bryson, David Blanchflower 21 October 2021

“With the mass rollout of COVID-19 vaccinations and the attendant decline in COVID-related deaths in most advanced economies, and with many economic indices turning positive, it looks like most economies are on the road to recovery although the data paint a confusing picture. 

For example, in the spring of 2020, wage growth jumped sharply at the same time unemployment was rising. This was in both the US and the UK. Since then, unemployment has been falling while wage growth remains high. This implies the wage curve slopes up, which seems unlikely. But other metrics are telling a different story, most notably those capturing consumer and business sentiment.

Two series – from The Conference Board on business conditions, employment and income six months hence, and from the University of Michigan on the financial situation in a year and business conditions a year and five years hence – tell the same story: sentiment peaked in spring or early summer. And it has been falling precipitously since (Blanchflower and Bryson 2021a). This is true for the US as a whole and for the eight largest states for which The Conference Board collect data.”

Continue reading here.