Why can’t professional macroeconomic forecasters predict recessions?

Resumen

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 at the individual level or isthe result of an aggregation bias. Using a Spanish survey of professional forecasters conducted by Funcas,I find that individual forecasters are indeed too optimistic before recessions. The reason is not that theybecome inattentive when the economy is in good shape. Instead, they put too much weight on the mostrecent developments when producing their forecasts. The analysis of their forecast revisions reveals thatbetter-than-expected data makes some forecasters to revise their forecasts upwards too much. These revisionsraise the consensus forecast and trigger herding by other forecasters, who also revise up their forecasts.Both factors lead to subsequent negative forecast errors, especially when a recession occurs. Consequently,professional forecasters could improve their forecasting performance by reacting less aggressively to the latestdata releases and by avoiding inefficient herding.