Predictions of growth in U.S. corporate profits: Asymmetric vs. symmetric loss

Abstract

This study evaluates the Federal Reserve and private forecasts of growth in corporate profits for 1984–2004. These forecasts are both rational and directionally accurate but suggest different loss structures. The Federal Reserve forecasts tend to significantly under-predict and imply asymmetric loss. The private forecasts, however, are free of such bias, suggesting symmetric loss. Given that the Federal Reserve forecasts are made to help with policymaking, our findings point to the Fed's cautiousness not to incorrectly predict the downward moves in growth in corporate profits. The private forecasts are made by experts who (with a strong profit-motivated interest) attempt to generate financial gain and thus predict the upward moves as accurately as the downward moves.