Subjective Probability Forecasts for Recessions

Evaluations And Guidelines For Use

Lahiri By Kajal Lahiri and J. George Wang

Kajal Lahiri is distinguished professor of economics and director of the Econometric Research Institute at the University at Albany, SUNY. He has been a visiting scholar at the Social Security Administration, U.S. Department of Transportation, and the International Monetary Fund. He has received grants and contracts from the National Science Foundation, World Bank, and many federal and New York state agencies. He earned a B.A. from Calcutta University, and a Ph.D. from the University of Rochester.

Wang J. George Wang is an assistant professor of finance at the business department of the College of Staten Island (CSI) of the City University of New York. Prior to joining CSI, he was a lead analyst of AT&T Bell Labs. He holds a Ph.D. in economics from the State University of New York at Albany and a M.A. and a B.A. in economics from Peking University in China.

Probabilistic forecasts are often more useful in business than point forecasts. In this paper, the joint subjective probabilities for negative GDP growth during the next two quarters obtained from the Survey of Professional Forecasters (SPF) are evaluated using various decompositions of the Quadratic Probability Score (QPS). Using the odds ratio and other forecasting accuracy scores appropriate for rare event forecasting, we find that the forecasts have statistically significant accuracy. However, compared to their discriminatory power, these forecasts have excess variability that is caused by relatively low assigned probabilities to forthcoming recessions. We suggest simple guidelines for the use of probability forecasts in practice.

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