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What Predicts U.S. Recessions?
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What Predicts U.S. Recessions?

Weiling Liu and Emanuel Moench
Federal Reserve Bank of New York, 2014
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Editorial Rating

7

Qualities

  • Comprehensive
  • Analytical
  • Innovative

Recommendation

Econometric forecasting is a complex but crucial task, particularly if it can correctly predict imminent changes in the business cycle. Economists Weiling Liu and Emanuel Moench evaluate the ability of macroeconomic models to forecast US recessions over the 1959–2011 period. They make a valuable contribution to an extensive body of research on this topic, revisiting and investigating forecast methods and variables, and exploring ways to optimize them. Their discussion is quite technical and makes for a careful, detailed read. getAbstract recommends this scholarly analysis to forecasters, econometricians and economists.

Take-Aways

  • Experts’ ability to forecast, well in advance, the onset of a recession is crucial for investors, policy makers, companies and individuals.
  • Equity market prices, credit factors and the slope of the US Treasury yield curve are proven predictors of prolonged economic slumps in the United States.
  • Adding an analysis of broker-dealers’ margin debit balances to the study of Treasury term spreads enhances forecasters’ ability to predict recessions in the long run.

About the Authors

Weiling Liu is a doctoral candidate at Harvard Business School, and Emanuel Moench is a research officer at the Federal Reserve Bank of New York.

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