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Could Diffusion Indexes Have Forecasted the Great Recession?

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  • Gabriel P. Mathy
  • Yongchen Zhao

Abstract

Was the Depression forecastable? In this paper, we test how effective diffusion indexes are in forecasting the deepest recession in U.S. history: the Great Depression. Moore (1961) considered the effectiveness of diffusion indexes, though retrospectively and not out-of-sample. We reconstruct Moore's diffusion indexes for this historical period and make our own comparable indexes for out-of-sample predictions. We find that diffusion indexes, including the horizon-specific ones we produce, can nowcast turning points fairly well. Forecasting remains difficult, but our results suggest that the initial downturn in 1929 may be forecastable months before the Great Crash. This is a novel result, as previous authors had generally found the Depression was not forecastable.

Suggested Citation

  • Gabriel P. Mathy & Yongchen Zhao, 2024. "Could Diffusion Indexes Have Forecasted the Great Recession?," Working Papers 2024-03, American University, Department of Economics.
    • Handle: RePEc:amu:wpaper:2024-03
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    More about this item

    Keywords

    Diffusion Index; Great Depression; Forecasting;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • N12 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: 1913-

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