Saturday, January 17, 2015

Forecasting Recessions

Robert Shiller recently wrote about on the value of economics. I agree with most of what he says, but he also seems to perpetuate a myth about the inability of economists to forecast downturns in the economy.


Shiiler states that “Indeed, economists failed to forecast most of the major crises in the last century, including the severe 1920-21 slump, the 1980-82 back-to-back recessions, and the worst of them all, the Great Depression after the 1929 stock-market crash.”

I am not going to address all of these recessions, but it is relatively easy to look back to 1980. In the New York Times I find this

“the April decline in the composite index was the fourth in the last six months and comes at a time when many private economists are predicting a mild recession during the last half of 1979.” New York Times June 1, 1979 pg. D1.

And this

“Summarizing the latest Data Resources forecast, Miss Mosser said that “the economy will at best slow down and at worst we’ll see a double dip come the first of this year.” New York Times Dec. 2 1980 pg. A1.

Not all economists agreed, but it is certainly not the case that no one saw it coming.

Forecasting recessions with a reasonable degree of accuracy is actually one of the easier things to do in economics. The yield curve, for instance, is an easy to use and pretty reliable tool. If it is upward sloping the chances of a recession in the near future are small. If it flattens out or slopes downward the chances of a recession are pretty good. Anyone paying attention to the yield curve should not have been surprised by our most recent recession.

It is harder to forecast the severity of recession, but Shiller was one of a number of economists that expressed concerns about the underlying strength of the economy in the time leading up to the most recent financial crisis, suggesting that next recession could be severe because of problems in financial markets.  

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