Chapter 3. Forecasting Output

This chapter surveys the recent literature on output forecasting, and examines the real-time forecasting ability of several models for U.S. output growth. In particular, it evaluates the accuracy of short-term forecasts of linear and nonlinear structural and reduced-form models, and judgmental forecasts of output growth. Our emphasis is on using solely the information that was available at the time the forecast was being made, in order to reproduce the forecasting problem facing forecasters in real-time. We find that there is a large difference in forecast performance across business cycle phases. In particular, it is much harder to forecast output growth during recessions than during expansions. Simple linear and nonlinear autoregressive models have the best accuracy in forecasting output growth during expansions, although the dynamic stochastic general equilibrium model and the vector autoregressive model with financial variables do relatively well. On the other hand, we find that most models do poorly in forecasting output growth during recessions. The autoregressive model based on the nonlinear dynamic factor model that takes into account asymmetries between expansions and recessions displays the best real time forecast accuracy during recessions. Even though the Blue Chip forecasts are comparable, the dynamic factor Markov switching model has better accuracy, particularly with respect to the timing and depth of output fall during recessions in real time. The results suggest that there are large gains in considering separate forecasting models for normal times and models especially designed for periods of abrupt changes, such as during recessions and financial crises.