Subjective Probability Forecasts for Recessions

Kajal Lahiri and J George Wang ()
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J George Wang: College of Staten Island, CUNY, Staten Island, NY, 10314, USA.

Business Economics, 2006, vol. 41, issue 2, 26-37

Abstract: Probabilistic forecasts are often more useful in business than point forecasts. In this paper, the joint subjective probabilities for negative GDP growth during the next two quarters obtained from the Survey of Professional Forecasters (SPF) are evaluated using various decompositions of the Quadratic Probability Score (QPS). Using the odds ratio and other forecasting accuracy scores appropriate for rare event forecasting, we find that the forecasts have statistically significant accuracy. However, compared to their discriminatory power, these forecasts have excess variability that is caused by relatively low assigned probabilities to forthcoming recessions. We suggest simple guidelines for the use of probability forecasts in practice.Business Economics (2006) 41, 26–37; doi:10.2145/20060204

Date: 2006
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