Predictable recoveries

A random walk with drift is a good univariate representation of US GDP. This paper shows, however, that US economic downturns have been associated with pre- dictable short-term recoveries and with changes in long-term GDP forecasts that are substantially smaller than the initial drop. To detect these predictable changes, it is important to use a multivariate time series model. We discuss reasons why univariate representations can miss key characteristics of the underlying variable such as predictability, especially during recessions.