Predicting US Recessions: Does a Wishful Bias Exist?

Sergey Smirnov

HSE Working papers from National Research University Higher School of Economics

Abstract: There is evidence in the economic literature that near cyclical peaks an optimistic bias exists in private expert forecasts of real GDP growth rates. Other evidence concerns differences in the accuracy of GDP forecasts made during expansions and those made during contractions. It has also been hypothesized that a wishful bias may hamper the ability to recognize the beginning of a recession in real-time. We tested consensus forecasts of quarterly GDP growth rates taken from SPFs conducted by PhilFed and found that they may be seen as unbiased only for time horizons j=0,1,2; for greater horizons they are over-optimistic. This over-optimism may also be observed for (j=1, 2) for forecasts made at peaks (at these moments the consensus usually points only to a slowdown of the economy but not to a contraction). Lastly, over-optimism may be observed for nowcasts (j=0) during cyclical contractions, including the first two quarters of a recession (in these cases the reality is usually worse than expected). Taken together, all these facts mean that some aversion to predicting US recessions exists. There are two possible reasons for this: a) experts rely too heavily on extrapolations (then changes in medium-long tendencies would be missed in real time); b) there is a wishful bias in forecasts against predicting recessions (this reluctance may be rooted in psychological factors). We give some arguments in favor of the thesis that the second factor is more important.

Keywords: Business cycles; Turning points; Recessions; Biased forecasts; SPF (search for similar items in EconPapers)
JEL-codes: E32 E37 (search for similar items in EconPapers)
Pages: 14 pages
Date: 2014
New Economics Papers: this item is included in nep-for and nep-mac
References: View references in EconPapers View complete reference list from CitEc
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Published in WP BRP Series: Economics / EC, November 2014, pages 1-14

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