Before your week ends and you head out the door, I wanted to share a new paper from St. Louis Fed. The title: Can Economists Predict Recessions? Short answer: Maybe a quarter ahead (but not always). Beyond that short time frame, it’s simply too variable.
Excerpt:
“These questions have taken on particular importance recently. In the past four quarters, economic forecasters have, on average, predicted a 42% probability of a contraction in the U.S. economy in the next quarter, according to the Survey of Professional Forecasters (SPF) conducted by the Federal Reserve Bank of Philadelphia. So far, no recession has occurred, although the forecasted risk of a downturn in the fourth quarter remains elevated at 34.4%.”
I like the old joke among economists and statisticians: When asked to make a forecast about a future recession, your answer should always be “about 40%.” Why? 50/50 is just a coin flip, so that’s useless; 75/25 is too one-sided. 40% is the Goldilocks forecast.
What makes the 40% forecast so useful is you appear to be correct regardless of which outcome occurs. If a recession doesn’t happen, you can always say “As I expected, a recession was the lower probability event, and did not occur.” If it does happen, your warnings were prescient, and you warned of a very real (e.g., 40%) probability of happening.
Kidding aside, Tim Harford reminds us that “In 2008, the consensus from forecasters was that not a single economy would fall into recession in 2009.” And the Philly Fed points out that “Economists cannot predict the timing of the next recession because forecasting business cycles is hard.”
Other than that I have yet to find forecasts of recessions to be of any real value to investors…
Sources:
Can Economists Predict Recessions?
By Jeremy Majerovitz
St. Louis Fed, September 26, 2023
Why Are Recessions So Hard to Predict? Random Shocks and Business Cycles
by Thorsten Drautzburg
Economic Insights, Q1 2019
Federal Reserve Bank of Philadelphia
An astonishing record – of complete failure
Tim Harford
FT, May 30, 2014
