from the Philadelphia Fed
— this post authored by Thorsten Drautzburg
Economists can’t tell you when the next downturn is coming […]. Expansions don’t die of old age: They’re murdered by bubbles, central-bank mistakes or some unforeseen shock to the economy’s supply (e.g., energy price spike, credit disruption) and/or demand slide (e.g., income/wealth losses).
– Jared Bernstein, Washington Post, 7/5/2018
Economists cannot predict the timing of the next recession because forecasting business cycles is hard. For example, at the onset of the 2001 recession, the median forecaster in the Survey of Professional Forecasters (SPF) expected real U.S. gross domestic product (GDP) growth of 2.5 percent over the next year, while in reality output barely grew. Again, on the eve of the Great Recession, forecasters were expecting GDP to grow 2.2 percent over the next four quarters, and we all know how that worked out.1 Why is it so hard to predict downturns – even while they are happening?
Most economists view business cycle fluctuations – contractions and expansions in economic output – as being driven by random forces – unforeseen shocks or mistakes, as Bernstein writes. As I will show, a model in which purely random events interact with economic forces can resemble U.S. business cycles. This randomness of economic ups and downs poses a challenge for macroeconomic forecasters because random events, by their very nature, are unpredictable.
[click on image below to continue reading]
Source
https://www.philadelphiafed.org/-/media/research-and-data/publications/economic-insights/2019/q1/eiQ119-predicting-recessions.pdf?la=en