Why can’t professional macroeconomic forecasters predict recessions?

Résumé

The professional forecasters’ inability to anticipate macroeconomic recessions is well documented. Theliterature has found that aggregate or consensus forecasts are too optimistic before downturns and toopessimistic before recoveries. This paper explores whether this result also holds with individual data. Using aSpanish survey of professional forecasters conducted by Funcas, I find that forecasters are indeed too optimisticbefore recessions for two reasons. First, strong herding behaviour around the consensus forecast prevents thoseforecasters perceiving the early signs of a recession from adjusting their expectations as much as needed topredict it. And second, some forecasters put too much weight on the most recent developments when producingtheir forecasts and fail to fully account for the reversion to the mean embedded in the data generating process.Both factors lead to negative forecast errors when a recession occurs. Consequently, professional forecasterscould improve their forecasting performance by placing less weight on indicators from the recent past and byavoiding inefficient herding.