IDEAS home Printed from https://ideas.repec.org/a/wly/jforec/v44y2025i2p320-338.html
   My bibliography  Save this article

Could Diffusion Indexes Have Forecasted the Great Depression?

Author

Listed:
  • 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.

Suggested Citation

  • 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
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/for.3196
    Download Restriction: no

    File URL: https://libkey.io/10.1002/for.3196?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Mathy, Gabriel & Stekler, Herman, 2017. "Expectations and forecasting during the Great Depression: Real-time evidence from the business press," Journal of Macroeconomics, Elsevier, vol. 53(C), pages 1-15.
    2. Stock, James H. & Watson, Mark, 2011. "Dynamic Factor Models," Scholarly Articles 28469541, Harvard University Department of Economics.
    3. Wesley Clair Mitchell, 1927. "Business Cycles: The Problem and Its Setting," NBER Books, National Bureau of Economic Research, Inc, number mitc27-1, June.
    4. Gabriel Mathy & Herman Stekler, 2018. "Was the deflation of the depression anticipated? An inference using real-time data," Journal of Economic Methodology, Taylor & Francis Journals, vol. 25(2), pages 117-125, April.
    5. Robert Goldfarb & H. O. Stekler & Joel David, 2005. "Methodological issues in forecasting: Insights from the egregious business forecast errors of late 1930," Journal of Economic Methodology, Taylor & Francis Journals, vol. 12(4), pages 517-542.
    6. Wesley Clair Mitchell, 1927. "Introductory pages to "Business Cycles: The Problem and Its Setting"," NBER Chapters, in: Business Cycles: The Problem and Its Setting, pages -23, National Bureau of Economic Research, Inc.
    7. Christina D. Romer, 1993. "The Nation in Depression," Journal of Economic Perspectives, American Economic Association, vol. 7(2), pages 19-39, Spring.
    8. Stekler, H O, 1972. "An Analysis of Turning Point Forecasts," American Economic Review, American Economic Association, vol. 62(4), pages 724-729, September.
    9. Dominguez, Kathryn M & Fair, Ray C & Shapiro, Matthew D, 1988. "Forecasting the Depression: Harvard versus Yale," American Economic Review, American Economic Association, vol. 78(4), pages 595-612, September.
    10. Arthur F. Burns & Wesley C. Mitchell, 1946. "Measuring Business Cycles," NBER Books, National Bureau of Economic Research, Inc, number burn46-1, June.
    11. Harold Barger, 1942. "Foreword, Outlay and Income in the United States, 1921–1938," NBER Chapters, in: Outlay and Income in the United States, 1921–1938 (Studies in Income and Wealth, vol. 4), pages -19--18, National Bureau of Economic Research, Inc.
    12. Eichengreen, Barry, 1996. "Golden Fetters: The Gold Standard and the Great Depression, 1919-1939," OUP Catalogue, Oxford University Press, number 9780195101133, Decembrie.
    13. Stock, James H & Watson, Mark W, 2002. "Macroeconomic Forecasting Using Diffusion Indexes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 147-162, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Albers, Thilo Nils Hendrik, 2018. "The prelude and global impact of the Great Depression: Evidence from a new macroeconomic dataset," Explorations in Economic History, Elsevier, vol. 70(C), pages 150-163.
    2. Sinclair Tara M, 2009. "Asymmetry in the Business Cycle: Friedman's Plucking Model with Correlated Innovations," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 14(1), pages 1-31, December.
    3. Sonia de Lucas Santos & M. Jesús Delgado Rodríguez & Inmaculada Álvarez Ayuso & José Luis Cendejas Bueno, 2011. "Los ciclos económicos internacionales: antecedentes y revisión de la literatura," Cuadernos de Economía - Spanish Journal of Economics and Finance, Asociación Cuadernos de Economía, vol. 34(95), pages 73-84, Agosto.
    4. Enrique A. López-Enciso, 2017. "Dos tradiciones en la medición del ciclo: historia general y desarrollos en Colombia," Borradores de Economia 986, Banco de la Republica de Colombia.
    5. Veaceslav Grigoras & Irina Eusignia Stanciu, 2016. "New evidence on the (de)synchronisation of business cycles: Reshaping the European business cycle," International Economics, CEPII research center, issue 147, pages 27-52.
    6. Arthur F. Burns, 1969. "The Nature and Causes of Business Cycles," NBER Chapters, in: The Business Cycle in a Changing World, pages 3-53, National Bureau of Economic Research, Inc.
    7. Silva, Aldy Fernandes da & Weffort, Elionor Farah Jreige & Flores, Eduardo da Silva & Silva, Glauco Peres da, 2014. "Gerenciamento de resultados e crises econômicas no mercado de capitais brasileiro," RAE - Revista de Administração de Empresas, FGV-EAESP Escola de Administração de Empresas de São Paulo (Brazil), vol. 54(3), May.
    8. Marlon Fritz & Thomas Gries & Yuanhua Feng, 2019. "Growth Trends and Systematic Patterns of Booms and Busts‐Testing 200 Years of Business Cycle Dynamics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 81(1), pages 62-78, February.
    9. Catherine Doz & Peter Fuleky, 2019. "Dynamic Factor Models," Working Papers 2019-4, University of Hawaii Economic Research Organization, University of Hawaii at Manoa.
    10. Pablo Mejía-Reyes & Reyna Vergara-González, 2017. "Are More Severe Recessions Followed by Stronger Early Expansions of Employment in the Mexican States?," The Review of Regional Studies, Southern Regional Science Association, vol. 47(3), pages 243-269, Fall.
    11. Martin Ellison & Sang Seok Lee & Kevin Hjortshøj O'Rourke, 2024. "The Ends of 27 Big Depressions," American Economic Review, American Economic Association, vol. 114(1), pages 134-168, January.
    12. Stock, J.H. & Watson, M.W., 2016. "Dynamic Factor Models, Factor-Augmented Vector Autoregressions, and Structural Vector Autoregressions in Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 415-525, Elsevier.
    13. Galbács Peter, 2021. "What did it take for Lucas to set up ‘useful’ analogue systems in monetary business cycle theory?," Economics and Business Review, Sciendo, vol. 7(3), pages 61-82, September.
    14. Malcolm Rutherford, 2001. "Institutional Economics: Then and Now," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 173-194, Summer.
    15. Victor Zarnowitz, 1991. "What is a Business Cycle?," NBER Working Papers 3863, National Bureau of Economic Research, Inc.
    16. Gabriel Mathy & Herman Stekler, 2018. "Was the deflation of the depression anticipated? An inference using real-time data," Journal of Economic Methodology, Taylor & Francis Journals, vol. 25(2), pages 117-125, April.
    17. McKay, Alisdair & Reis, Ricardo, 2008. "The brevity and violence of contractions and expansions," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 738-751, May.
    18. Antonello D’Agostino & Domenico Giannone & Michele Lenza & Michele Modugno, 2016. "Nowcasting Business Cycles: A Bayesian Approach to Dynamic Heterogeneous Factor Models," Advances in Econometrics, in: Dynamic Factor Models, volume 35, pages 569-594, Emerald Group Publishing Limited.
    19. Boumans, Marcel & Morgan, Mary S., 2023. "Do you see it this way? Visualising as a tool of sense-making," LSE Research Online Documents on Economics 120216, London School of Economics and Political Science, LSE Library.
    20. Travis J. Berge & Òscar Jordà, 2011. "Evaluating the Classification of Economic Activity into Recessions and Expansions," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(2), pages 246-277, April.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:jforec:v:44:y:2025:i:2:p:320-338. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www3.interscience.wiley.com/cgi-bin/jhome/2966 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.