Modeling and Forecasting Macroeconomic Downside Risk

We document a substantial increase in downside risk to US economic growth over the last 30 years. By modeling secular trends and cyclical changes of the predictive density of GDP growth, we recover an accelerating decline in the skewness of the conditional distributions, with significant, procyclical variations. Decreasing trend-skewness, turning negative in the aftermath of the Great Recession, is associated with the long-run growth slowdown stared in the early 2000s. Short-run skewness fluctuation imply negatively skewed predictive densities ahead, and during recessions, often anticipated by deteriorating financial conditions, while positively skewed distributions characterize expansions. The model delivers competitive out-of-sample (point, density and tail) forecasts, improving upon standard benchmarks, due to financial conditions providing strong signals of increasing downside risk.