Forecasting Recessions Using Stall Speeds

62 Pages Posted: 19 May 2011 Last revised: 15 Nov 2011

See all articles by Jeremy Nalewaik

Jeremy Nalewaik

Board of Governors of the Federal Reserve System

Date Written: April 14, 2011

Abstract

This paper presents evidence that the economic stall speed concept has some empirical content, and can be moderately useful in forecasting recessions. Specifically, output tends to transition to a slow-growth phase at the end of expansions before falling into a recession, and the paper designs Markov-switching models that behave in that way. While the switching models using output growth alone produce a considerable number of false positive recession signals, adding the slope of the yield curve, the percent change in housing starts, and the change in the unemployment rate to the model reduces false positives and improves recession forecasting. The switching model is particularly good at forecasting at long horizons, outperforming Blue Chip consensus forecasts.

Keywords: Markov-switching models, business cycles, forecasting

JEL Classification: E32, E37

Suggested Citation

Nalewaik, Jeremy John, Forecasting Recessions Using Stall Speeds (April 14, 2011). FEDS Working Paper No. 2011-24. Available at SSRN: https://ssrn.com/abstract=1845788 or http://dx.doi.org/10.2139/ssrn.1845788

Jeremy John Nalewaik (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Washington, DC 20551
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