Michael W. McCracken

English

Research Papers in Economics

February 2009 NationalEconomicTrends
Views expressed do not necessarily reflect official positions of the Federal Reserve System.
I
ndividual households and firms, as well as local, state,
and federal governments, make economic decisions
based on their view of the future. For a household, this
may entail deciding whether to apply for a mortgage based
on the expectation of having a job in the future. For a firm,
a decision to invest in the building of a new plant rests on
expected future demand for its products. Similarly, federal
agencies make decisions about developing infrastructure
based on expectations of future revenue.
Firms and government agencies (and, to a lesser extent,
households) look to professional forecasters for advice on
the future state of the economy. This essay looks at how a
recessionary environment affects the accuracy of economic
forecasts, which in turn affects economic decisionmaking.
Although there are numerous professional economic
forecasting agencies, the Survey of Professional Forecasters
(SPF) is a publicly available forecasting source that is com-
monly used and discussed in various media outlets. This
discussion uses the mean of those forecasts as a proxy for
professional forecasters in general.1 In total, we review 26
years’ worth of quarterly, 1-year-ahead mean SPF forecasts
from 1981:Q3 through 2007:Q3. The subsequent forecast
errors—ranging from 1982:Q3 through 2008:Q3—are con-
structed using the most recent and updated data. We use the
squares of these errors as a measure of their accuracy.
The chart shows the squared
forecast errors associated with
the mean SPF forecast of U.S.
gross domestic product (GDP)
growth2 and the unemployment
rate. The shaded areas indicate
U.S. recessions, as determined
by the National Bureau of
Economic Research. Over the
time frame shown in the chart,
on average, professional fore-
casters have tended to be less
accurate when the U.S. 
economy was in recession.
During a recession, the
mean squared errors (MSEs)
associated with forecasts of
GDP growth and the unem-
ployment rate are 0.58 and 1.95, respectively. In each case,
the MSEs are four times larger than those made when the
economy is not in a recession. Even if the very large errors
during and immediately after the 1981 recession are omitted
from the calculations, the MSEs are still roughly twice as
large—a smaller but still significant difference.
One main contributor to the deterioration in the forecasts
is an inability to detect turning points—that period when the
economy shifts from being in a recession to not being in a
recession—and vice versa. Another contributor is a clear bias
in the forecasts during a recession. Forecasts of GDP growth
and the unemployment rate both generally tend to be overly
optimistic: Forecasts of GDP growth tend to be too high,
whereas those for the unemployment rate tend to be too low.
Perhaps not surprisingly, the degree of accuracy of the two
series tends to move together; the correlation between the two
series is roughly 80 percent. The unfortunate conclusion is
that during a recession, economic decisions are not only
more important, but also more difficult to make.
—Michael W. McCracken
1 The SPF is available at www.philadelphiafed.org/research-and-data/real-
time-center/survey-of-professional-forecasters/data-files/. 
2 The SPF predicts gross national product (GNP) through 1991 and GDP
thereafter.
research.stlouisfed.org
How Accurate Are Forecasts in a Recession?
Squared Forecast Errors
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1982:Q3 1985:Q4 1989:Q1 1992:Q2 1995:Q3 1998:Q4 2002:Q1 2005:Q2 2008:Q3
Unemployment (left axis)
GDP (right axis)

How accurate are forecasts in a recession?

http://research.stlouisfed.org/publications/net/20090201/cover.pdf

How accurate are forecasts in a recession?

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Research Papers in Economics