Wishful Bias in Predicting Us Recessions: Indirect Evidence

Sergey Smirnov and Daria Avdeeva ()
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Daria Avdeeva: National Research University Higher School of Economics

HSE Working papers from National Research University Higher School of Economics

Abstract: There is evidence in the economic literature that professional forecasters are unsuccessful in predicting recessions, but the reasons for these failures are still not clear. Meanwhile, this phenomenon has been little studied on the basis of quarterly estimates for various target horizons. We analysed quarterly consensus forecasts of real GDP growth rates and probabilities of recession taken from the Survey of Professional Forecasters (SPF) conducted by PhilFed and established several stylized facts including: “alarm signals” usually appear only after cyclical peaks; consensus forecasts of recessions for distant target horizons (more than two quarters) have never met except several quarters after the second oil shock; as a rule, pre-recession probabilities of recessions are much less than 50%; the expected durations of recession are less than actual ones; the Mincer-Zarnowitz test with a dummy for recessions reveals that SPF give biased forecasts of real GDP growth rates for almost all target horizons; experts regularly overestimate growth rates during recessions; adding a dummy for recessions significantly increases adjusted R2s; consensus forecasts clearly signal a recession only after a black swan; the majority of experts avoid predicting declines in real GDP before a recession; depth of contraction is even more underestimated for quarters after black swans. None of these stylized facts proves the unwillingness of professional forecasters to predict recessions (especially prolonged ones) in a direct way. However, in our view, together they constitute indirect evidence for the existence of a wishful bias against predicting recessions. If this bias exists, customers of SPF forecasts should take this into account in their decision-making processes.

Keywords: Recession; Forecasting; Wishful Bias; the Survey of Professional Forecasters. (search for similar items in EconPapers)
JEL-codes: E32 E37 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2016
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (1)

Published in WP BRP Series: Economics / EC, May 2016, pages 1-24

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