Forecasting cyclical turning points: The record in the past three recessions

Abstract

Many economic decision-makers seem to attach special importance to the phase of the business cycle – whether the economy is in an expansion or a recession – above and beyond the exact magnitude of the change in economic activity. The Gramm-Rudman-Hollings legislation, for example, contains a special provision suspending the budget deficit targets in the event of a recession. This concern about the stage of the business cycle is both a cause and an effect of the pioneering work by the National Bureau of Economic Research in identifying and dating cyclical turning points, the times when the economy has shifted from one phase to another. The Bureau's cycle chronology reaches back to 1854 on a monthly basis and even further on an annual basis. The origin of this empirical approach predates the development of the National Income and Product or GNP Accounts and thus predates the development of macroeconometric models of GNP. While the designation of cyclical turning points derives from analyses of monthly data, the quarterly GNP accounts are the language of most macroeconomic models and forecasts.1 This presents a problem for those who ask, as many invariably do, how well cyclical turning points have been predicted. Most forecasts do not provide an explicit statement of when the economy will change from one phase to the next, and any attempt to assess their accuracy must first select the configuration of macroeconomic forecast data that can be taken as an indication that a cyclical turning point will occur.

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