C. Elton Hinshaw

Rendigs Fels

English

Research Papers in Economics

This PDF is a selection from an out-of-print volume from the National
Bureau of Economic Research
Volume Title: Forecasting and Recognizing Business Cycle Turning Points
Volume Author/Editor: Fels, Rendigs and C. Elton Hinshaw
Volume Publisher: UMI
Volume ISBN: 0-870-14479-0
Volume URL: http://www.nber.org/books/fels68-1
Publication Date: 1968
Chapter Title: PART 1 1948â€”61: Degree of Certainty
Chapter Author: Rendigs Fels, C. Elton Hinshaw
Chapter URL: http://www.nber.org/chapters/c1088
Chapter pages in book: (p. 19 - 24)5
1948—61: Degree of Certainty
The quotations excerpted from the publications of the various analysts
were scored for degree of certainty as well as for accuracy of dating.
The user of forecasts needs to know not only what the forecast is but
also the degree of confidence the forecaster has in it. Unfortunately,
commentators often take refuge in ambiguity instead of giving odds on
various precisely defined possibilities.
A general practice of communicating the degree of confidence in a
forecast by stating subjective odds would not only be a clearer way of
describing the outlook to the reader but would also facilitate retrospective
appraisal of the record of predictions. For the specific purposes of the
present study, increasing recognition of an imminent or recent peak
would be revealed by rising odds on a downturn, and increasing recogni-
tion of a trough by rising odds on an upturn.22
The scoring system chosen was based on the odds on a cyclical turn
implicit in the language of the forecast. Each quotation was scored
for degree of recognition on a scale from 0 to 100 (since we only used
multiples of five, there were twenty-one possible scores). A score of 50
means a roughly even chance of a cyclical turning point. A score of 100
represents virtual certainty (strictly speaking, chances greater than 97 1/2
percent) •23 As indicated earlier, each quotation was scored indepen-
22 If all forecasters gave odds, in time a large enough sample would be gener-
ated to make possible a test of the hypothesis that half of the forecasts stated to
have five chances in ten come true, 60 per cent of those given six chances in ten,
etc. Such data, however, are too rare to make such a test.
23 No corresponding statement can be made about low scores, which are biased
downward compared to the implicit odds on a turning point. In the absence of
any evidence to the contrary, we assumed that a publication regarded the odds
of a turn in the target period as "normal." The target period is a three-month
interval centered on the NBER reference date. Since recent expansions have
averaged between two and three years in length (somewhat less in earlier times),
the "normal" odds of a peak in any three-month interval during a period known
to be an expansion may be taken as one in ten or a little less. Accordingly, we
gave a publication a score of 10 in the vicinity of peaks unless it implied that20 Recognition Patterns of Business Analysts
dently by C. Elton Hinshaw and myself, and discrepancies were resolved
by discussion as much as possible. When a doubt remained, the two
original scores were averaged.24 The resulting scores are subjective.
Although in a majority of cases the two initial (independent) scores
were close together, in a disconcerting number of cases they differed
widely. The same person scoring the same series of forecasts after a
lapse of several months sometimes gave quite different scores.
As a result of both the nature of the materials and the procedures
followed,the scoresare more reliable for tracing the pattern of
increasing recognition by a single forecaster than for comparing the
forecasts of different publications. Quite subtle shifts in wording and
emphasis from one month to the next by a given publication often
revealed fine shades of increasing uncertainty about prospects for con-
tinued expansion in the vicinity of peaks (and similarly for troughs);
this is why as many as twenty-one different possible scores were needed.
Even so, the scores could not always reflect discernible changes in the
attitudes of the forecasters. On the other hand, the difference in language
of different publications was often hard to interpret. It was much easier
to tell whether a given forecaster had become more or less optimistic
since last month than to tell whether he was more or less optimistic
than his fellows. Such difficulties, however, are minimal in the vicinity
of 50 and 100. If a forecaster expresses great certainty, the only question
is whether the score should be 95 or 100. Similarly, it is comparatively
easy to tell whether a forecaster thinks a turn more (or less) likely
than not. Therefore, errors in scoring on the wrong side of 50 are un-
likely. This is fortunate because 50 can be regarded as the dividing
line between recognition and failure to recognize.
Our procedure was to score the ten (or more) quotations for a given
forecaster in succession before scoring other forecasters for the same
peak or trough. This procedure accentuated the inherent tendency for the
pattern of scores for a given forecaster to be more reliable than com-
parisons among different forecasters. Despite the weaknesses of the
scores, they are reliable enough for the purposes to which they are put
the odds were greater or less than "normal." Since contractions average shorter
than expansions, in the case of troughs we gave a score of 15 unless the publica-
tion implied that the odds were greater or less than normal. Defining the target
period as three months, however, turned out to be too restrictive and was not
adhered to rigidly for scores of 50andhigher.
24Inthe case of weekly publications, the weekly scores for each month were
averaged. Where we did not have quotations for a given week, we interpolated.1948—61. Degree of Certainty
CHART 1-5
75
50
25
0
Degree of Certainty of Forecasts of Cyclical Peaks and Troughs,
—3
100
75 —.
50
25
0
Ten Analysts, 1948—61
Peak or
trough
-3 -2 -1 0 +1 +2 +3 +4 +5 +6
Months before (—)orafter (+)NBER reference date
SouRcE: Appendix I, Table C.
here. But the reader should be cautioned against using the findings for
more ambitious purposes.
Chart I-S exhibits the expected pattern of increasing certainty
time. Panel A shows a marked difference between peaks and troughs.
21
100
—2 —1
Ponel B
0 +1 +2 +3 +4 +5 +6
(indicators
— 1948-61
I I I I I
over22
100 —
75—
0
Recognition Patterns of Business Analysts
CHART 1-6
Comparison of Scores for Accuracy of Dating at Four Peaks
and Four Troughs, 1948—61
(averages of eight analysts)
Peak
-3 —2 -1 0 +1 4-2 +3 +4
Months before (—) or ofter (4-) NBER reference dote
SOURCE: Appendix I, Table D.
At troughs, the mean score for eight forecasters first exceeds 50 (fifty-
fifty odds) one month before the NBER reference date. At peaks, a
mean of 50 is not achieved until three months after the reference dates.
If confirmation is defined to mean an average score of 95 (95 per cent
confidence), the group of analysts studied were able to confirm that a
trough had occurred six months after the event but could not do so well
for peaks. Averaging peaks and troughs together, only one of the ten
analysts had an average score greater than 50 two months before the
Peoks
50 -
25 —
— . —.—.—.—. —.—.--.
o -
—3
100
75
50
25
.—
1953 a. — — — - _. —. —.
Trough
-2 -1 0 +1 +2 +3 +4 +5 +6
+5 +61948—61: Degreeof Certainty
CHART 1-7
23
Comparison of Scores for Degree of Certainty at Four Peaks
100
75
50
25
0
—3
100
75
50
25
0
and Four
(averages
Peak
Troughs, 1948—61
of eight analysts)
+6
SouRcE: Appendix I, Table E.
—2 —1 0 +1 +2 +3 +4 +5
-3 -2 -l 0 +1 +2 +3 +4 +5 +6
Months before (—) or after (+) NBER reference date24 Recognition Patterns of Business Analysts
reference date. Four out of eleven achieved an average score of 95 five
months after the reference date (counting peaks and troughs together)
noneearlier. If all scores for all months are averaged for each fore-
caster, the scores range from 44 to 71. The same publication that scored
highest for timing also scored highest for degree of certainty. Panel B
of Chart 1-5 compares the "best" and the "worst" analysts for 1948—61.
It also shows the average pattern for 1957—61 of the two publications
that depended heavily on business cycle indicators.
All the average scores, for both accuracy of dating and degree of
certainty, are subject to a serious limitation. As Charts 1-6 and 1-7 show,
there is great variation among the scores for different turning points, not
only the systematic differences between peaks and troughs already
noted, but also differences among individual peaks and individual
troughs. Discussion of each turn is in order.
6
The Recognition Pattern.'
A Chronological Review
The 1948 Peak
Scores for both dating and certainty run lower for peaks than for
troughs, and among the four peaks since World War II, they run lower
for 1948 than for any other year except 1960. Although there is nothiiig
to choose between the certainty patterns for 1948 and 1957 shown in
Chart 1-7, the 1948 scores for dating are noticeably lower (see Chart
1-6). Of the 80 scores for dating near the 1948 peak (eight forecasters,
ten months), 75 were zero. (Seventy-one were zero because no forecast
was made.)
25Thisincludes one publication not used in the averages shown in Charts
1-4 and I-S. The omission of this publication reduces the number with an average
of 95fivemonths after the reference date to three in ten.

Forecasting and Recognizing Business Cycle Turning Points

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