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Forecasting U.S. Recessions and Economic Activity

Author

Listed:
  • Dalibor Stevanovic
  • Rachidi Kotchoni
Abstract
This paper proposes a framework to produce multi-horizon forecasts of business cycle turning points, average forecasts of economic activity as well as conditional forecasts that depend on whether the horizon of interest belongs to a recession episode or not. Our forecasting models take the form of an autoregression (AR) of order one that is augmented with either a probability of recession or an inverse Mills ratio. Our empirical results suggest that a static Probit model that uses only the TS as regressor provides comparable fit to the data as more sophisticated non-static Probit models. We also find that the dynamic patterns of the term structure of recession probabilities are quite informative about business cycle turning points. Our most parsimonious AAR model delivers better out-of-sample forecasts of GDP growth than the benchmark models considered. We construct term structures of recession probabilities since the last oficial NBER turning point. The results suggest that there has been no harbinger of a recession for the US economy since 2010Q4 and that there is none to fear at least until 2018Q1. GDP growth is expected to rise steadily between 2016Q3 and 2018Q1 in the range [2.5%,3.5%].

Suggested Citation

  • Dalibor Stevanovic & Rachidi Kotchoni, 2016. "Forecasting U.S. Recessions and Economic Activity," CIRANO Working Papers 2016s-36, CIRANO.
    • Handle: RePEc:cir:cirwor:2016s-36
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    File URL: https://cirano.qc.ca/files/publications/2016s-36.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Manuel Paquette-Dupuis & Dalibor Stevanovic & Rachidi Kotchoni, 2019. "Prévisions de l’activité économique en temps de crise," CIRANO Project Reports 2019rp-04, CIRANO.
    2. Michael Dotsey & Shigeru Fujita & Tom Stark, 2018. "Do Phillips Curves Conditionally Help to Forecast Inflation?," International Journal of Central Banking, International Journal of Central Banking, vol. 14(4), pages 43-92, September.

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    More about this item

    Keywords

    Augmented Autoregressive Model; Conditional Forecasts; Economic Activity; Inverse Mills Ratio; Probit; Recession;
    All these keywords.

    JEL classification:

    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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