From using the forecasting method above it should have been possible to predict that the economy would stagnate, and with high likelihood enter a recession, about 1,5 years before the dated recession. Also I argued that forecasters using this method should have been able to predict that the future recession would with high likelihood be of great magnitude at least 6 months before December 2007. But with this said, this forecasting approach carries a number of more or less vital strengths and weaknesses. With this in mind the following discussion of quality is not exhaustive, but carries some of the most important points. The discussion will be much compared to a more econometric approach to forecasting which arguably carries the biggest differences from the approach described in this paper.
After the introduction to economic indicators in section 6, this section will look at the possibilities of predicting the recession starting in December 2007 using these indicators. Again it is important to remember that as this paper is written ex.post with revised data and a broad understanding of what went wrong1, it could easily be pointed at numerous of relatively detailed and complicated indications that something was fundamentally wrong with the US economy ahead of the recession. But instead this section will show how investors and corporation could have kept track of the business cycle and forecasted the 2007 recession using a broad, but still simple, analyzing approach towards the US economy. This means that many vital factors and details on why the US economy entered a recession will not be discussed.
The vast studies of business cycles are invaluable to the possibilities of understanding the state of the macro economy and to be able to predict the future movements of the economy. Many of the most famous economists in history, such as Keynes and Schumpeter have been researching this subject, but in this section I will mainly use the research by The National Bureau of Economic Research (NBER) as their research is widely accepted among economists in the U.S. today. This section will give an introduction to the different business cycle stages and how they are measured by NBER.
The probability for corporate success varies together with the business cycle, and there is no doubt that the state of the macro economy influences the rate of investor and corporate success. This means that the potential risks of changes in business cycle growth rate is a potential threat to all market participants, which needs to be handled through risk management. This does not mean that it is possible to avoid business cycle risks altogether, but it simply means that these risks needs to be accounted for, and managed appropriately as part of a risk management scheme.
After years of more or less continuous growth and relatively low macroeconomic volatility during the years named “The Great Moderation”1, the US economy entered in December 20072 what seems to have been the deepest recession since The Great Depression3 The recession has been of relatively long duration and contained both a credit-crunch and a significant downturn in the housing market. This has in turn resulted in rising unemployment and a monthly bankruptcy rate which has increased by almost 67%4 between Q3 2007, which was the quarter before the business cycle peak, and Q4 2008.