The authors build a small-scale econometric model based on the permanent income theory of consumption and balanced economic growth in order to study the influence of permanent and transitory factors on the level of economic activity.

During the second half of the 1990s, forecasters made large and persistent underpredictions of GDP growth; subsequently, they missed the drop off into the recession of 2001. Forecasters do not appear to have behaved unusually during this period: Their out-period forecasts were not far from their...