Forecast Walk-Downs and Strategic Incentives for Bias

Abstract

We document a walk-down in GDP growth projections that is akin to that in sell-side analysts’ earnings forecasts. While the walk-down in earnings forecasts has been generally attributed to the strategic interplay between corporate managers and sell-side analysts, professional macro forecasters affiliated with the Federal Reserve are less susceptible to outside pressure to curry favor with managers. Our evidence shows that asymmetrically high forecasting difficulty in downturns relative to upturns of the U.S. economy is relevant in explaining the walk-down in macro forecasts. Without rejecting the expectations game between managers and sell-side analysts, our paper offers a more auspicious characterization of forecast walk-downs. An overarching implication is that research on the properties of sell-side analysts’ forecasts should consider strategic incentives for bias interacted with information about the state of the economy and heterogeneity in the cyclical exposure of individual firms.