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What The Surprise Japanese Recession Says About Economic Forecasting

Japan’s economy has fallen into a recession. What’s especially scary about that is that virtually no one expected it.

Japanese gross domestic product shrank at a 1.6 percent annual rate in the third quarter of the year, according to preliminary figures released Monday. That follows a 7.3 percent contraction in the second quarter. Two negative quarters in a row is one common definition of a recession, though not the one used by the National Bureau of Economic Research, the U.S.’s semi-official arbiter of recessions.

The news caught economists by surprise. The second-quarter contraction was widely expected following a big sales tax increase that took effect in April. But forecasters expected a rebound in the third quarter: In a Wall Street Journal survey of 18 economists, the median forecast was for a 2.25 percent growth rate. Not one predicted a contraction.

Monday’s figure is only preliminary. But it is nonetheless worrisome for Japan, which has been struggling to jump-start its economy after decades of stagnant growth. It also has global implications: Japan’s economy is the world’s third largest, and its latest struggles come at a time when growth is slowing in China and Europe as well.

The surprise should also give pause to economists in the U.S. When the Bureau of Economic Analysis said the U.S. economy contracted at a 2.1 percent rate earlier this year, most economists shrugged it off as a one-off fluke driven by bad weather. They appear to have been correct: The U.S. went on to post its best consecutive quarters of growth since the recession.

But that outcome was far from guaranteed. As I noted at the time, negative quarters are rare outside of recessions. Economists are notoriously terrible at forecasting downturns: Most economists failed to “predict” the last U.S. recession even after it had already begun. (They also miss in the other direction, forecasting recessions that never took place.)

By all indications, the U.S. economy is the strongest it’s been since the recession began. But it’s worth noting that the recovery has lasted more than five years, longer than the average economic expansion since World War II. The next recession will come eventually — and as Japan’s example makes clear, the odds are we won’t see it coming.

Ben Casselman was a senior editor and the chief economics writer for FiveThirtyEight.