Why Economists Consistently Miss Recession Predictions
Economists' growth forecasts for the year following a recession are off by an average of 200% in April. So, is forecasting recessions even feasible?
Humans dedicate roughly one-third of their lives to sleep, while economies experience recessions about one-ninth of the time.
Yet, economists consistently struggle to accurately predict these downturns. A recent International Monetary Fund (IMF) working paper by Zidong An, João Tovar Jalles, and Prakash Loungani analyzed real GDP growth forecasts against actual outcomes for 63 countries from 1992 to 2014. Their findings highlight a persistent lag in recognizing recessions.
On average, a recession year results in a 2.98% drop in real GDP. However, forecasts made the previous April (marked as "Apr[t-1]" in the accompanying chart) were off by a staggering 202%. Instead of anticipating a contraction, the consensus optimistically predicted a 3.03% growth. Even IMF forecasters failed to improve on this.
Economists tend to revise their predictions downward as a recession nears but typically don’t forecast a contraction until April of the recession year itself. By October, their projections align more closely with actual results. Still, being somewhat accurate 10 months into the forecasted year hardly qualifies as prophetic.
The difficulty economists face in predicting recessions is well-known. For instance, in April 2008, the IMF forecasted 0.6% growth for the U.S. economy the following year, but it actually contracted by 2.6%. Although this 123% error was large, it was still better than average.
Despite frequent criticism for their forecasting errors, economists remain the best source for economic outlooks. Media outlets continue to rely on their projections because, frankly, there’s no superior alternative—unless one chooses to ignore expert analysis altogether and navigate blindly.
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