What can we learn from surveys of business expectations?

The recent financial crisis was accompanied by an unprecedented deterioration in businesses’ expectations for future economic activity. This article examines the strength of the signal that measures of these expectations have provided for output growth in the past. Recessions have typically been preceded by large declines in surveys of business expectations. But these measures have, on occasions, given false signals of recessions, falling sharply with little discernable response in economic activity. And small movements in these survey measures tend to contain little information. The article considers techniques that may help to distinguish whether large declines in measured expectations are meaningful or not. But it concludes that this must ultimately be left to judgement. Consequently, while measures of business expectations are useful economic indicators, they must be interpreted with care.