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Could Diffusion Indexes Have Forecasted the Great Depression?

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  • Gabriel Mathy
  • Yongchen Zhao

Abstract

Was the Depression forecastable? In this paper, we test how effective diffusion indexes are in forecasting the deepest recession in US history: the Great Depression. In a seminal paper, Moore 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.

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  • Gabriel Mathy & Yongchen Zhao, 2025. "Could Diffusion Indexes Have Forecasted the Great Depression?," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 44(2), pages 320-338, March.
    • Handle: RePEc:wly:jforec:v:44:y:2025:i:2:p:320-338
    DOI: 10.1002/for.3196
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    References listed on IDEAS

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