How could everyone have been so wrong? Forecasting the Great Depression with the railroads

Abstract

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Financial frictions and employment during the Great Depression

“…468-469). Furthermore, Klug, Landon-Lane, and White (2005) use unique survey data on the forecasts of railroad shippers to show that American businesses were surprised by the depth and duration of the Great Depression. 12 We follow the economic history literature and use the terms "suspensions" and "failures" interchangeably, although many banks that suspended operations did not ultimately fail.…”

Inflation Expectations and Recovery from the Depression in 1933: Evidence from the Narrative Record

“…Specifically, Cecchetti writes, "This econometric evidence complements the direct historical evidence reported in a recent paper by Daniel Nelson (1991)…Nelson examines articles in the contemporary business and financial press to argue that in 1929 and 1930 many analysts expected the price level to decline by as much as 50 percent to its pre-World War I level" (p. 142). 8 Indeed, the findings of a study by Klug, Landon-Lane, and White (2005) reinforce the concern that retrospective time series forecasts may not accurately reflect the forecasts of contemporary observers in real time. In evaluating whether the large decline in output during the depression was anticipated, these authors examine contemporary survey data on railroad shippers' forecasts for economic activity.…”

“…As such, we treat it as both a forecaster and a news magazine, though its forecasts are more sporadic than those from the other sources. 41 In making use of contemporary forecasts, our study is similar in spirit to Dominguez, Fair and Shapiro (1988) and Klug, Landon-Lane, and White (2005), who also examine contemporary forecasts, though the focus of these two studies is on whether the large declines in output during the Depression were anticipated. 42 Indeed, in his study of the usefulness of the Taylor rule for interpreting past policy decisions and mistakes, Orphanides (2003) emphasizes the importance of using the information that was available when decisions were made, in particular "real-time perceptions of the state of the economy" (p. 998).…”

Methodological issues in forecasting: Insights from the egregious business forecast errors of late 1930

“…He concluded that until mid-1930 only a mild deflation was anticipated, but after that a more severe deflationary period was expected. 2 Similarly, Klug et al (2002) analyzed a set of actual forecasts made by railroad shippers throughout the 1930s and concluded that these shippers consistently overestimated the demand for railroad cars. Those shippers did not believe that demand would decline as substantially as it actually did.…”