March 28, 2019, 1:00 AM EDT Corrected April 29, 2019, 12:40 PM EDT
Why Are Economists So Bad at Forecasting Recessions?
Professional forecasters feel safer in a crowd. There’s not much incentive to stick one’s neck out.
By Simon Kennedy and Peter Coy
In 1966, four years before securing the Nobel Prize for economics, Paul Samuelson quipped that declines in U.S. stock prices had correctly predicted nine of the last five American recessions. His profession would kill for such accuracy.
With recession talk returning to haunt financial markets and the corridors of central banks, a review of the past suggests that those who are paid to call turning points in economic growth have a dismal record. Unlike the stock market, they’re more likely to miss recessions than to predict ones that never occur. The lowlight, of course, was the widespread failure to forecast America’s Great Recession, which began in December 2007—nine months before Lehman Brothers filed for bankruptcy.
In February, Andrew Brigden, chief economist at London-based Fathom Consulting, worked out that of 469 downturns since 1988, the International Monetary Fund had predicted only four by the spring of the preceding year. By the spring of the year in which the downturn occurred, the IMF was projecting 111 slumps, fewer than a quarter of those that actually happened. In a post on his firm’s website,
Brigden wrote that while IMF economists monitoring Equatorial Guinea, Papua New Guinea, and Nauru can walk tall for their recession calls, the rest pretty much flopped. “Since 1988 the IMF has never forecast a developed economy recession with a lead of anything more than a few months,” he says.
IMF economists point out that they’re not alone in missing downturns. A
recent working paper by Zidong An, Joao Tovar Jalles, and Prakash Loungani discovered that of 153 recessions in 63 countries from 1992 to 2014, only five were predicted by a consensus of private-sector economists in April of the preceding year. And the economists tended to underestimate the magnitude of the slump until the year was almost over.
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