Could Diffusion Indexes Have Forecasted the Great Recession?

Gabriel Mathy and Yongchen Zhao

No 2024-03, Working Papers from American University, Department of Economics

Abstract: Was the Depression forecastable? In this paper, we test how effective diffusion indexes are in forecasting the deepest recession in U.S. history: the Great Depression. Moore (1961) considered the effectiveness of diffusion indexes, though retrospectively and not out-of-sample. We reconstruct Moore's diffusion indexes for this historical period and make our own comparable indexes for out-of-sample predictions. We find that diffusion indexes, including the horizon-specific ones we produce, can nowcast turning points fairly well. Forecasting remains difficult, but our results suggest that the initial downturn in 1929 may be forecastable months before the Great Crash. This is a novel result, as previous authors had generally found the Depression was not forecastable.

Keywords: Diffusion Index; Great Depression; Forecasting (search for similar items in EconPapers)
JEL-codes: C53 E32 E37 N12 (search for similar items in EconPapers)
Date: 2024
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