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Insight of the Day: Can Consumers’ Expectations Predict Downturns?

Main Finding:

  • Consumer and business expectations about future employment levels accurately predict economic downturns. This predictive power was evident before the Great Recession, the COVID-19 recession, and the economic uncertainty following Russia's invasion of Ukraine.

Key Points:

  • Survey data on consumer fear of unemployment and firms' staffing expectations outperformed many professional forecasts.

  • These expectations reflect on-the-ground knowledge of economic transactions, giving consumers and businesses valuable, timely insights.

  • From 1985 to 2022, fear of unemployment rose across Europe ahead of major economic downturns.

  • Had central banks incorporated this data into their models, they might have predicted the Great Recession earlier.

Implications:

  • Economic policymakers should pay close attention to consumer and business sentiment surveys for accurate, high-frequency indicators of potential downturns.

  • This data can provide early warning signs, allowing for more timely policy interventions.

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