Happy Groundhog Day IIEP Blog Readers!
This morning I recorded an interview with Marketplace Morning Report, to be aired on February 2nd in honor of Groundhog Day. The segment was about economic forecasting. Originally the woman I was corresponding with to set up the interview wanted me to talk about my own forecasts. Although I do prepare some forecasts for the Survey of Professional Forecasters, I regularly admit that I generally don’t trust economic forecasts, particularly my own. Her response to my hesitation in sharing my forecasts with 5.9 million listeners (according to her count), was “as long as you’re a little more accurate than Pux Phil, I’m sure you’ll be fine.” Sadly, I’m concerned that when it counts the most, economic forecasters may not be any more accurate than a groundhog.
You might think, hope even, that economic forecasters should be more reliable than a groundhog. When it comes to recessions however, even the best forecasters out there seem to fail miserably to predict both when we’re going into one and when we’re coming out of one. In fact, in an article I wrote with my colleagues Fred Joutz and H.O. Stekler, we found that although the Federal Reserve staff, quite possibly the best forecasters for the US economy overall, know whether or not we are in a recession currently, they cannot predict whether or not we will be in one just one quarter in advance. This is a big problem since monetary policy actions tend to take at least a couple of quarters to take effect.
Researchers continue to search for ways to improve models that forecast recessions. One of my favorite models is the one by Marcelle Chauvet and Jeremy Piger which currently suggests only a 2.7% probability of a recession. But, even this model is just trying to catch a recession as it is going on, not predict it in advance. Until researchers find a model that better predicts recessions, perhaps we should not expect so much from our forecasters and policymakers. Maybe recessions are just unpredictable. Or maybe we just need to find the right groundhog…