The Forecasting Challenge
Many economists claim that recessions can't be predicted. They're partly right. Typical forecasting models used by economists can't accurately predict a recession:
as the IMF concluded, in a study of economist forecasts from 63 countries, their “record of failure to predict recessions is virtually unblemished.”
But economists are wrong in thinking that accurately predicting recessions is impossible: as The Economist magazine noted in 2005, “ECRI is perhaps the only
organisation to give advance warning of each of the past three recessions; just as impressive, it has never issued a false alarm.”
Forecasting turning points in economic growth and inflation is exactly what ECRI does.
Most forecasters use models that reduce a complex economy to a rigid set of largely backward-looking relationships. Simply put, they try to predict the near
future based on what has happened in the recent past. This can work for a while – until the critical moment when a turning point approaches, and such models reliably fail.
This is because extrapolating from the recent past is a sure-fire recipe for being surprised by the next turn.
Our Advantage: Strong Foundation, Ongoing Advances
A century-long tradition
of business cycle research
gives ECRI a singular perspective on the ebb and flow of the economy, even in the face of unexpected shocks.
Our approach builds on the work of ECRI's co-founder, Geoffrey H. Moore, and his mentors, Wesley C. Mitchell and Arthur F. Burns.
Our track record reflects the major strides we have made since the mid-1990s, following the development of a critical mass of leading indicator systems. Our advancements include:
- The creation of a comprehensive framework of leading indexes for key aspects of each economy (economic growth, inflation and employment)
and for major sectors (services, manufacturing, construction, and foreign trade)
- Broad international coverage of over 21 economies, including the first-ever leading indicator systems for China, India, Brazil and Russia
- A breakthrough in understanding and monitoring global cyclical contagion
ECRI's forecasting framework is the state of the art.
Our indicator systems are designed to predict the timing of future changes in the economy's direction. They signal those
turns before the fact, and well before the consensus. ECRI's focus is on identifying when those changes
in direction will occur (see chart).
According to the mainstream view, recessions are caused by shocks propagating through the economy. In contrast, our framework, based on many decades of research, finds that endogenous cyclical forces periodically open up windows of cyclical vulnerability that make it much easier for exogenous shocks to precipitate recessions. In the absence of cyclical weakness, such shocks are not recessionary. Because our leading indexes monitor when the economy becomes susceptible to shocks, they effectively anticipate recessions.
The discipline and objectivity of our approach allows us to step away from the crowd at the right time, and presciently predict turning points,
while most forecasters — and their clients — sit and wait.
ECRI is an independent research institution, acknowledged for its objectivity and non-partisanship: we have a broad membership base and are not constrained by
dominant academic paradigms, political ideologies, or support from special-interest groups.