When people ask questions about the economy, they often ask about predictions. Will there be a recession soon? When will inflation come down? Why didn’t economists see the 2008 crisis coming? And perhaps most importantly: Do economists have any idea what’s going to happen to the economy?
These questions have taken on particular importance recently. In the past four quarters, economic forecasters have, on average, predicted a 42% probability of a contraction in the U.S. economy in the next quarter, according to the Survey of Professional Forecasters (SPF) conducted by the Federal Reserve Bank of Philadelphia. So far, no recession has occurred, although the forecasted risk of a downturn in the fourth quarter remains elevated at 34.4%.
At the same time, policymakers, including those at the Federal Reserve, rely on economic forecasts (both external, such as the SPF, and internal, such as the Fed Board of Governors’ Tealbook forecasts) to inform how they should adjust interest rates. If the economy is expected to remain hot (high inflation and low unemployment), that will typically call for higher interest rates than if the economy is expected to cool (falling inflation and weaker economic growth).